It may be hard to believe, but community associations ("Associations") occasionally deal with homeowners who don't think they are required to pay assessments.
The reasoning for these beliefs can range from "I don't use the pool," to "I am not part of the Association." Although the majority of such claims are baseless, some may merit consideration. Some of this confusion stems from an Association's governing documents, while some situations arise through the uncertainties of public auctions.
Why are encumbrances important to an Association?
Encumbrances are generally anything that restricts the use of land or creates obligations for a homeowner. Encumbrances come in a variety of forms, such as liens, easements, and the governing documents of a planned community. When Covenants, Conditions, & Restrictions ("CC&R") are placed on the public record, they become an encumbrance on the land located in that community. Associations rely on these CC&Rs to establish rules and restrictions for all homeowners within the community.
The CC&R is essentially a contract between the homeowner and the Association. When a homeowner purchases a lot subject to a CC&R, it automatically binds that homeowner to the contractual obligations within the CC&R. Because the CC&R essentially creates obligations for future purchasers of the lot, these encumbrances are said to "run with the land." So long as the encumbrance is publicly recorded, the new homeowner will be bound to the terms of the CC&R. One of the most crucial requirements, of course, is the obligation to pay assessments to the Association.
The confusion surrounding public auctions
Whether real property is sold through a foreclosure, tax sale or bankruptcy proceeding, there may be uncertainty whether the property was auctioned free from all encumbrances. When real property is sold in one of these manners, it is generally sold "as-is" and "with all faults," which includes most liens and encumbrances. However, there are occasions where the government entity or bankruptcy court indicate a sale is "free and clear of liens, interests and encumbrances," which leads to some confusion.
When sold at a public sale, some liens and encumbrances are automatically discharged and wiped clean from a property's title. When all liens and encumbrances are removed from the property's title, the purchaser is said to receive "clear title" to the property. While foreclosure sales typically sell the property "as-is," providing that the property may be encumbered, taxing authorities or bankruptcy court might indicate that the property is sold "free and clear of liens."
North Carolina has specific procedures in place that allow a government entity with taxing authority to sell real property to recover delinquent taxes, called tax foreclosure. These tax foreclosures are generally conducted in the same manner as the typical foreclosure under a deed of trust or mortgage. Once the property is sold at public auction, ownership is transferred to the purchaser by way of a commissioner's deed. Commissioner's deeds are similar to quitclaim deeds in that they contain no guaranties that the property is free of liens and encumbrances. This means that all covenants or easements which are recorded prior to the attachment of the tax lien will remain affixed to the title.
However, while the typical tax sale transfers all prior encumbrances, the taxing body still holds the power to convey a piece of property free of encumbrances. Although not common, this key distinction means that Associations should be wary of the manner in which property is purchased through a tax foreclosure.
The Power of the Restrictive Covenants?
Another area of concern is the CC&R itself. A CC&R generally provides a list of individuals and entities that are specifically subject to its terms. Likewise, the CC&R can also include groups that are 'exempt' from its terms. Without careful drafting, it is possible that the CC&R could inadvertently omit some group, creating the potential for a purchaser to avoid being subject to its terms, no matter the manner of sale.
This is an especially important detail when dealing with municipalities and tax foreclosures. Generally, courts in North Carolina have held that restrictions (such as an Association's CC&R) are enforceable against any purchaser who purchases the land with notice of those restrictions. However, a taxing authority may attempt to claim it is exempt from an Association's restrictions. Regardless of whether the taxing body feels it can assert governmental immunity, or if it has taken ownership of the property free of encumbrances, the potential exists for a legal dispute.
CC&Rs, which are properly recorded, are an encumbrance that obligates all current and future homeowners in the community to pay assessments. However, if the CC&Rs are poorly drafted, or a tax foreclosure is conducted "free of encumbrances," the Association can find itself in a legal battle to enforce its covenants against the new owner. Although the Association can't always prevent these situations from occurring, it can place itself in the best position possible for when they do arise. Associations should be sure to seek experienced legal counsel when drafting or amending its CC&Rs, or when it discovers property in the community is being liquidated at a public sale that indicates it is being sold free of encumbrances.
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This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.