In the fight against delinquent unit owners, New Jersey’s Condominium Associations have a unique tool at their disposal – the “super” assessment lien. The liens are “super” in that, by virtue of the New Jersey Condominium Act, N.J.S.A. § 46:8B-1, et. seq. (the “Act”); as amended by L. 1995, c. 354, § 4 (the “Super Lien Amendment”); they are entitled to limited “priority” over previously recorded liens, including mortgages. This statutory modification to the common law system, in which liens are given priority based on the date of recording, is an added benefit to condominium associations seeking to collect delinquent assessment fees. In practice, the statutorily-conferred priority of an assessment lien assures that, in the event of a foreclosure concerning the liened condominium unit, an association will be paid back first, even before a mortgage lender. However, the “super” assessment lien has certain limitations.
To understand the “super” assessment lien, it’s helpful to start with the basics. A “lien” is “[a] legal right or interest that a creditor has in another’s property, lasting usually until a debt . . . is satisfied.” Black’s Law Dictionary 933 (7th ed. 1999). Liens “secure” a debt by “attaching” to some form of property, whether real (i.e., a condominium unit) or personal (i.e., a car). If the Lienor (the holder of the lien) is not repaid by the Lienee (the owner of the liened property), the Lienor will look to the liened property to satisfy the debt.
Under the common law, where multiple liens attach to the same property, each lien is granted “priority” based on the order in which it is recorded. A lien recorded on January 1st is “senior” to a lien recorded on January 2nd and a lien recorded on January 2nd is “junior” to a lien recorded on January 1st. The more “senior” the lien, the more likely that the Lienholder will be paid from the proceeds of the sale of the liened property. Thus, a lien’s priority largely dictates its value.
Prior to the Super Lien Amendment, assessment liens were governed by this traditional priority regime. This led to an all-too-common scenario for associations, in which a senior mortgage was recorded against a unit first, and repayment of that mortgage swallowed up all foreclosure sale proceeds, while a subsequently recorded assessment lien was extinguished without ever being paid. Consider the following hypothetical: On April 1, 2012, Bank records a mortgage lien, which secures a $500,000 loan, on Unit A. On April 15, 2012, Condominium Association records an assessment lien, which secures a $1500 debt to the association for unpaid assessments, on Unit A. On May 1, 2012, Unit A is sold at a Bank initiated foreclosure to a third party for $500,000. What result? The Bank, with its senior mortgage lien, is paid back in full. Because there are no left over proceeds from the sale, Condominium Association’s junior lien is extinguished and Condominium Association loses out on all $1500.
Of course, where an association records an assessment lien, it will almost always be doing so subsequent to the recordation of a mortgage. In that case, under the old regime, associations would constantly see their assessment liens completely extinguished at a bank’s foreclosure sale without recovering any funds, whereas the Super Lien Amendment significantly changes this result. As noted above, this simplistic example does not tell the entire story. The jump in priority granted to the associate lien is subject to limitations in terms of the amount of association debt, the type of association debt, and the type of lien that the association “super” lien may take priority over. First and foremost, the amount of the “super” assessment lien is limited to no more than six months’ worth of “customary condominium assessments.” The association must therefore be aware that, when it comes time to be paid from the proceeds of a foreclosure sale, only that portion of the assessment lien which meets the statutory definition of six months’ worth of “customary condominium assessments” will have priority. Also, the jump in priority is afforded only to condominium associations because, as stated above, the statutory rights spring from the New Jersey Condominium Act.
Additionally, while the original Act provides that a standard assessment lien may include “a share of common expenses . . . together with interest thereon and, if authorized by the master deed or bylaws, late fees, fines and reasonable attorney’s fees,” the Super Lien Amendment narrows this category stating that the amount of the assessment lien entitled to priority does not include “amounts for reserves or contingencies . . . late charges, penalties, interest or any fees or costs for the collection or enforcement of the assessment or any lien arising from the assessment.” Thus, in addition to the limitation of six months of assessments, where an association fi les an assessment lien, inclusive of legal fees, late fees, and reserves for contingencies; it must take note that the amount of the assessment lien entitled to priority may be lower than the amount of the assessment lien based on these inclusions. If the assessment lien includes other charges (such as legal fees or late fees) or more than six months of assessments, those charges will have priority according to the recording date of the assessment lien and will be paid back once all “senior” liens have been satisfied.
In addition, a “super” assessment lien is not entitled to priority any and all liens. The “super” assessment lien does not have priority over any municipal liens; federal tax liens; or liens, including mortgage liens, recorded prior to April 1, 1996. Moreover, a “super” assessment lien only retains priority for 5 years following the date it is recorded. After 5 years, it assumes its normal priority according to the date on which it was filed. Finally, no amount of an assessment lien is entitled to priority if it is filed after either (a) the filing of a lis pendens indicating that a foreclosure proceeding has commenced against a liened unit or (b) the receipt by the association of notice of such a foreclosure proceeding. With respect to this last limitation, it is therefore prudent for an association to avoid delay when recording any assessment liens.
Whenever fi ling an assessment lien, an association must also be wary of the applicable notice requirements. As noted by the court in Loigman v. Kings Landing Condominium Ass’n, Inc., 324 N.J. Super. 97, 102 (Ch. 1999); every lien “‘destroys the ability of a property holder to convey marketable title’” and, as such, a lienee is constitutionally entitled to due process. While the Act vaguely states that an association may file a lien for unpaid assessments upon “proper notice” to the unit owner, the Loigman Court determined that due process requires “that type of notice which would give the unit owner knowledge of the lien’s existence and an opportunity to do something about it.” This means notice simultaneous with the recording of the lien (or within a reasonable time thereafter).
In addition, an association fi ling a lien “which may be granted priority pursuant to” the Super Lien Amendment, must “notify, in writing, any holder of a first mortgage lien on unit on which the lien is to be fi led.” Failure to offer proper notice to either the unit owner or a first mortgage holder may result is the discharge of the lien. Therefore, an association should provide simultaneous notice to both when a lien is recorded.
An association may wish to obtain a current title search prior to recording an assessment lien so that they can establish whether a pre-April 1, 1996 mortgage exists and so that they can likely obtain the address of any fi rst mortgage holder. This will provide the association with a valid notice address to satisfy the aforementioned notice requirements. Even if the search does not uncover the name of a fi rst mortgage holder, an association which exercises a good faith effort, but is unable to ascertain the identity of a holder of a prior recorded mortgage will be deemed to have substantially complied with the Super Lien Amendment’s notice requirement. Obtaining a current title search should satisfy this requirement of a “good faith effort.”
In conclusion, the “super” assessment lien is a useful tool in that it provides additional means for a condominium association to be repaid from the proceeds of a foreclosure sale of the liened property. However, associations must be cognizant of the benefits and drawbacks of the “super” assessment lien in order to successfully protect their interest in unpaid assessments.