By: Andrew L. Unterlack, Esquire
Eisenberg, Gold & Agrawal, P.C.

In the event a borrower fails to pay their mortgage, the Lender often proceeds with a Foreclosure Action. The culmination of the Foreclosure Action is the Sheriff’s Sale, which results in a Sheriff’s Deed transferring title to the property to the Lender or a third-party bidder. The common misconception is that such a transfer is always free and clear of all liens and encumbrances. However, it is possible that a subsequent owner, whether it be the Lender or an innocent third-party, may be liable to a homeowner’s association for the prior owner’s outstanding arrears in dues, assessments, capital contribution and other fees accrued on the account.
In the rarely cited New Jersey Supreme Court case of Highland Lakes Country Club and Community Association v. Robert Franzino, 186 N.J. 99 (2006), a homeowners’ association had its deed covenants and conditions upheld as an equitable lien, including application of its By-Laws to hold new owners liable to satisfy all arrears in dues, assessments, capital contributions and other fees accrued on the account from prior owners. The Court held that the Association’s asserted lien was extinguished by operation of the foreclosure judgment and sale, and the property was no longer encumbered by that lien. However, although that lien became unenforceable, the underlying debt that gave rise to that lien was not affected by the Sheriff’s Sale. The underlying By-Laws provided that “membership privileges in the Club will not be granted on resale or other transfer of ownership of property until all Club dues, assessments and initiation fees in arrears are paid in full.” (emphasis added). Although the By-Laws lacked a specific reference to arrears “accrued by predecessors in title,” the Supreme Court found the language sufficient to conclude “all arrears” plainly conveyed all. Moreover, the Supreme Court, by virtue of common-sense reasoning, recognized that at “resale or other transfer of ownership of property” there are and there can be no “dues, assessments and initiation fees in arrears” other than those already due from prior owners.
The terms and conditions set forth in this homeowners’ association By-Laws was found by the Court to lack any ambiguity. As such, it was incumbent upon the Lender and/or any innocent third-party to review such terms and condition, as subsequent owners of the property would be bound by such deed covenant and conditions as well as By-Laws. In acquiring the property, the subsequent owner acquired the obligation to pay for the debt of any predecessors-in-interest.
Although this New Jersey Supreme Court ruling has not garnered much attention, there are many lessons to be learned from this case, including warranted due diligence in transactions of this nature.
On behalf of Lenders providing financing of property subject to a homeowners’ association or thereafter pursuing a Foreclosure Action upon a default of the underlying debt, make sure to acquire and consider the implications of the associations’ deed covenants and conditions, as well as existing By-Laws. Similar deed covenants and conditions supported by respective By-Laws are not presently dominant in New Jersey, although many communities in North Jersey have adopted the Highlands or substantially similar language. Review of such By-Laws is critical, as any significant deviation in the language gives rise to a challenge of the attempted reliance upon the Highlands precedent. By careful analysis at the financing stage, the Lender can avoid becoming entangled in such restrictive provisions and potentially subjecting itself to future liabilities of its borrower (or at a minimum, factor such potential risk into the lending decision).  On behalf of innocent third-party purchasers, whether at Sheriff’s Sale or directly from the Lender, conduct a thorough review of the underlying homeowners’ association documents and communicate with the Management Company or the Board to obtain, in writing, the present outstanding account ledger pertaining to the property. Most importantly, require satisfaction of any arrears debt prior to closing title to the property.
On behalf of homeowners’ associations, review, reconsider and modify your existing By-Laws to strengthen your ability to pursue defaulted association obligations against subsequent owners of the property. While a new homeowners’ association can be guided accordingly to include protective provisions in its deed covenants and conditions as well as respective terms in its By-Laws, an existing homeowners’ association can likely only modify its By-Laws. However, such modifications may be subject to legal challenge as it was not intended at the formation of the community and the revised By-Laws will thus not be supported by respective deed covenants and conditions. For the sake of simplicity, reliance should be placing on using identical or substantially similar language to that set forth in the Highlands case. Eisenberg, Gold & Agrawal, P.C. is an experienced Creditors’ Rights law firm with the expertise required to navigate these potential issues for its clients, whether on behalf of homeowners’ association, Lenders, or third-party purchasers. To discuss this matter in further detail and how it might impact your interests, please contact our office.