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What is a Contest of Lien, and how Does my Association Respond to it?
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What is a Contest of Lien, and how Does my Association Respond to it?

July 31, 2018 Community Association Industry Legal Blog

Reading Time: 5 minutes


You’re the President of a condominium association or an HOA.  You’ve had a problem owner for years—someone who doesn’t pay his assessments. Or when he does, payment is late and he incurs penalties and interest, and then later fights those penalties and interest.  The owner is basically a drain on the association’s budget and time, causing management multiple headaches per month.  After deciding enough is enough, your association authorizes the association’s attorney to initiate the lien process.

After sending a notice of intent to record a lien and waiting 30 days (or 45 days for an HOA), you record a lien and send the owner a notice of intent to foreclose the lien.  You feel confident that the owner, now with a lien recorded against his unit, will pay the outstanding balance.  One day your association, or its attorney, receives a letter from the owner, but instead of including the anticipated payment of the outstanding assessments, it instead encloses a copy of the owner’s recently-recorded Notice of Contest of Lien.  Feeling a pit in your stomach, you call the association’s attorney, fearing that you have lost your lien rights.

What Is The Notice Of Contest Of Lien?

Don’t have a panic attack. There is no need to fear the Notice of Contest of Lien, which is a routine statutory procedure.  The Notice is the condo or home owner telling the association to put its money where its mouth is. Essentially, it requires the association to file suit to foreclose its lien within 90 days (as opposed to the standard one-year deadline), or the association’s line is unenforceable. This applies to both condominium associations and HOAs.

Often, an association records a claim of lien wit the hope that litigation to foreclose the lien will not be necessary. The thought is that the recordation of the lien will prompt the owner to understand that the outstanding assessment balance can no longer be ignored.  However, the Notice of Contest eliminates the association’s ability to take a “wait-and-see” posture.  The association must file suit to foreclose its lien within 90 days of service of the Notice of Contest.  To be clear, the Notice of Contest is not a defense to the lien. Nor does it affect the validity of the lien itself.  It is simply a mechanism owners use to force the association to either file suit to foreclose, or lose its lien rights.

What Should You Do After Receiving a Notice of Contest of Lien?

After the association is served with a copy of a validly-recorded Notice of Contest, the association needs to immediately discuss the Notice of Contest with its attorney.  The association will need to make many decisions regarding its lien.  First, the association should discuss whether a lawsuit to foreclose its lien is in the association’s best interest.  Perhaps the owner has a large first mortgage on the property, meaning that any foreclosure by the association would be subject to the mortgage. Perhaps you are aware that the owner is about to declare bankruptcy, which would wipe out the association’s lien. Truly, there are many factors that could influence whether the association wants to proceed with foreclosure of its lien.

If your association wants to proceed with filing suit to foreclose its lien, you’ll then want to ensure that the notices of intent to lien and to foreclose the lien were properly served. If they weren’t, your association will lose its rights to collect attorney’s fees and costs during the foreclosure.  As you can imagine, the loss of this right stands to greatly affect the determination of whether or not to file suit to foreclose a lien.

Additional Considerations By The Association

The association will also want to consider whether the owner might have any valid defenses to the lien that were not previously identified or known.  Maybe there is an accounting issue and past payments were missed. Maybe the owner purchased the unit or home at a foreclosure sale, and improper charges were included in the assessment balance.  There are a plethora of reasons why the lien might be factually unenforceable and all should be considered by the association upon receiving a Notice of Contest.

A lot of research is needed to move forward the right way after receiving a notice of contest of lien

The Association’s Financial Ability

Lastly, the association will want to consider whether it has the financial ability to prosecute a lien foreclosure.  Suits like these are not typically very costly, and attorney’s fees and costs are recoverable upon prevailing in the lien foreclosure. Nonetheless, the association will still have to incur fees and costs during the prosecution of the suit, which will usually total several thousand dollars.  Because some associations are small, with a correspondingly small budget, this financial burden may prove unworkable.

Conclusion

After weighing the options, your association may decide to proceed with foreclosure of its lien.  If so, you will need to ensure the suit is filed within 90 days of having been served with the Notice of Contest.  Because if the association doesn’t do so, it will lose its ability to enforce its lien.  While the association can subsequently re-initiate the lien process, that takes additional time and money. And remember that other events, such as bankruptcy or a mortgage foreclosure action, may also occur, which will affect your association’s ability to successfully use the lien procedure to obtain payment of the outstanding assessment balance.

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