Do you remember when you first discovered that the concept of law – as discussed theoretically in school – was significantly different from how it is played out in reality? Please allow me to provide an Arkansas-based example of what happens when the cost/benefit analysis of defending what is obvious under the law weighs heavily in favor of tossing hundreds of years of property law out the window.
When new subdivisions are surveyed and platted, the ordinary method of establishing restricted districts is to file a plat and bill of assurance, whereby the owner obligates himself not to convey except in conformity with the restrictions imposed in the bill of assurance. The theory upon which these restrictions are imposed is that one taking title to land with notice that it is subject to restrictions upon its use will not, in equity and good conscience, be permitted to violate its terms.
Pursuant to Arkansas law, every ‘deed, bond or instrument of writing’ that affects the title to real property within this state ‘shall be constructive notice to all persons from the time the instrument is filed for record … in the proper county’ of the contents of the document. Based on this statute, Arkansas courts have held that language employed in a properly recorded bill of assurance can create a continuing lien on property for future assessments. The most notable example is the 1975 case Kell v. Bella Vista Village Property Owners Association.
It is not uncommon for the bill of assurance to provide for the assessment of fees for the maintenance and preservation of the common areas of the subdivision. The language in the bill of assurance reviewed by the Kell court and determined to create a continuing lien on the property for future assessments was that the ‘annual and special assessments, together with such interest thereon and costs of collection thereof as hereinafter provided, shall be a charge on the land and shall be a continuing lien upon the property against which each such assessment is made.’
Because it is a properly recorded lien, it has priority over any subsequent encumbrances and will not be extinguished by a foreclosure. Therefore, any unpaid assessments at the time of sale must be paid.
However, a bill of assurance that creates a continuing lien for any unpaid assessment may subrogate the lien to the holder of the first mortgage or deed of trust by including language to that effect. If so, then all liens for unpaid assessments will be extinguished by a foreclosure.
If the bill of assurance does not contain language creating a continuing lien on property for future assessments, any lien for unpaid assessments recorded subsequent to the mortgage or deed of trust being foreclosed will be extinguished by the foreclosure sale. In the theoretical conclusion, it is necessary to look at the recorded bill of assurance for each particular subdivision to determine how homeowner association (HOA) assessments and liens will be treated upon foreclosure of the mortgage or deed of trust.
That is where the scholarly analysis of the law ends and the reality of doing business as a title insurance company begins. Following a foreclosure sale, when the foreclosed property is purchased, a title insurance company will issue the purchaser a title policy. Sometimes, as part of welcoming the new neighbors to the neighborhood, the HOA sends the new owner demand for any previously owed HOA assessments and liens, whether extinguished as part of the foreclosure action or not. Upon receipt of such demand, the new owner pulls out his freshly issued title insurance policy and calls his title company to have it cleared up.
This is why the cost of defending the claim typically outweighs the cost of paying it. Most claims tend to be small (generally less than $2,000), meaning the title company begins losing money just in taking the call or opening the letter and setting up the file.
In reality, however, there does not appear to be any simple, quick resolution to this issue. Therefore, as it stands, it appears the title insurance companies will continue to pay out claims that were extinguished in a foreclosure sale based on the simple analysis that it is cheaper to do so than to fight each claim as it trickles in.
Kristin Camp is an attorney in the foreclosure legal department of Little Rock, Ark.-based Wilson & Associates LLC. She can be contacted at email@example.com.