Q&A: Assessment Issues; Does Developer Owe Dues?

Assessment Issues; Does Developer Owe Dues?

Question:  I was delinquent in my mortgage payments and was facing foreclosure. I also had a separate lien against my property for nonpayment of HOA dues. Fortunately, I was able to sell my home via a “short sale.” In connection with the short sale, my mortgage lender removed the HOA lien from the property in order to transfer ownership to the buyer. However, the HOA is now saying that it is going to seek a civil judgment against me for the remaining amount of HOA dues that were not paid at closing. Can they do this?

Answer:  The short answer is “yes.” In North Carolina, a homeowners’ association has two options for collecting unpaid assessments: it can file a lien against the home and foreclose, which is basically the same process as a mortgage foreclosure, or it can file a lawsuit against the ownerpersonally for the amount of unpaid assessments that accrued while the owner owned the property. The difference is that the former is a legal proceeding against the property, while the latter is a legal proceeding against the person (the owner).

Think about it in terms of a mortgage loan on a home. If the borrower does not pay the mortgage, a lender can foreclose on the property. But if the lender chooses to do so, it can elect to file a lawsuit directly against the borrower for the debt. Also, if the lender forecloses and the foreclosure sale does not generate enough funds to satisfy the debt, the lender can then file a lawsuit against the borrower for the amount left unpaid (in some circumstances). This is known as a “deficiency claim.” Similarly, if an HOA forecloses its lien and there are amounts left unpaid, the HOA can then file a lawsuit against the owner personally to collect the balance. The action does not always just have to be against the property.

Often homeowners who lose their homes to mortgage foreclosures, or even sell them via short sales as you did, believe they don’t owe unpaid HOA assessments. The fact is that the “personal liability” of those unpaid assessments follows the owners even after the homes are sold or foreclosed. In most cases, however, the HOA doesn’t pursue lawsuits against former owners under these circumstances, since the cost and difficulty of obtaining and collecting a judgment make it not worthwhile to pursue.

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Question:  In a residential development governed by the North Carolina Planned Community Act, can a developer exempt itself from paying dues for road and common-area maintenance indefinitely?

Answer:  Under North Carolina law, developers are not prohibited from exempting lots owned by themselves and homebuilders from assessments. This practice is allowed by the North Carolina Planned Community Act, which has this to say about assessments in § 47F-3-115:

“(a)        Except as otherwise provided in the declaration, until the association makes a common expense assessment, the declarant shall pay all common expenses. After any assessment has been made by the association, assessments thereafter shall be made at least annually.

(b)        Except for [certain assessments with limited application], all common expenses shall be assessed against all the lots in accordance with the allocations set forth in the declaration.”

The key words are found in the last sentence above. It provides that a community’s declaration of covenants, conditions, and restrictions establishes the protocol for how assessments are levied against lots, including whether the developer may be exempt from paying dues. This practice is actually quite commonplace. Sometimes it’s a complete exemption; in other cases the developer and builders pay a reduced rate (perhaps half or one-third of what homeowners pay). The period of exemption can run until a certain date, or indefinitely, depending on what the declaration says. Most developers, whether the declaration requires them to or not, will fund the operating losses of an HOA in a developing community until there are enough dues-paying homeowners for the HOA to become financially self-sustaining.

This column was originally published in the Charlotte Observer on October 29, 2016. © All rights reserved.

Mike Hunter