Tennessee Amends Condominium Lien Law to Clarify Lack of Superpriority RightOn Tuesday, Tennessee Governor Bill Haslam signed HB 2401, amending Tennessee’s condominium statue to make it clear that condominium associations cannot acquire a “superpriority” lien that trumps a first security interest on the same property. As a result of the amendment, it is now clear that under Tennessee law a condominium only has a “payment priority” interest – that is, the right to receive six months’ worth of delinquent common expense assessments owed by a unit’s owner when the mortgagee forecloses on the property.

Tennessee is one of 24 states that had adopted some form of the Uniform Condominium Act or Uniform Common Interest Organization Act. Those model laws included ambiguous text that left it unclear as to the sort of interest a condominium or other common interest organization acquires on property within the association when the unit’s owner fails to make the required payments for association dues. For years, lenders and common interest organizations in those states operated as if the organization received only a payment priority, meaning the priority right to be paid after the mortgagee foreclosed on its first security interest in the property. In the past few years, however, state courts in Washington, Nevada, Massachusetts, and Rhode Island, and the Court of Appeals for the District of Columbia have issued opinions holding that the statutes actually provide a “superpriority” lien to the organization, which takes priority over the lender’s first security interest – meaning not only that the association’s lien survives the lender’s foreclosure, but also that the association can foreclose on its interest and extinguish the lender’s security interest.

The recent slew of decisions interpreting those laws has created turmoil in the lending community, particularly in the State of Nevada, which had both the highest percentage of properties subject to common interest organizations and one of the highest mortgage default rates in the country during the housing crisis. As we’ve documented, lenders and servicers continue to fight for their loans in the State on several grounds, including under arguments that the state law is preempted as to federally insured loans, trumped by the Housing and Economic Recovery Act of 2008 as to loans held by Fannie Mae and Freddie Mac, and unconstitutional in light of the Due Process and Takings Clauses. Lenders and servicers have also pointed out that, in many cases, they attempted to pay the “superpriority” portion of the HOA’s lien before the HOA’s foreclosure, and thereby extinguished the lien. The merit of all of those arguments has yet to be finally resolved, however; the Nevada Supreme Court’s most recent ruling suggested that the question will come down to a balancing of the facts and equities at trial.

The Mortgage Bankers Association has taken the lead in attempting to work with States to amend their existing laws in order to avoid another crisis like the one brewing in Nevada, including by working with the Tennessee Legislature to help it amend its law. But even now, several more States – including Alabama and Colorado, among others – have laws on their books that closely track the language that courts have held creates a superpriority lien capable of extinguishing a lender’s first security interest. Until those laws are amended – or the highest court in each State interprets them differently from how other courts have construed the same language – lenders with security interests in those States should beware of any association’s lien.