Rhode Island Joins Lists of True Super-Priority Lien States for Condo AssociationsIn December 2015, the Rhode Island Supreme Court issued an opinion holding that Rhode Island’s Uniform Condominium Act provides a true “super-priority” lien to condominium owner associations (COAs) when a condominium owner is delinquent in paying the COA assessments. This super-priority lien—applicable to condo association liens only—takes priority over a lender’s first security interest in the property. Rhode Island is one of more than 20 states that has adopted some form of the Uniform Condominium Act or Uniform Common Interest Organization Act. Like the Uniform Condominium Act, Section 34-36.1-3.16(b)(2) of the Rhode Island Condominium Act provides that a COA’s delinquent assessment lien is “prior to any mortgage or deed of trust . . . to the extent of the common expense assessments based on the period budget adopted by the association . . . which would have become due in the absence of acceleration during the six (6) months preceding the foreclosure of the interest of the unit owner.” This particular statutory language has caused confusion and alarm in the lending community, where thousands of homeowner association (HOA) and COA sales across the United States threaten to render lenders’ substantial loans unsecured. After the Supreme Court of Rhode Island’s decision in Twenty Eleven, LLC v. Botelho, Rhode Island now joins states like Nevada that allow the extinguishment of a first mortgage after a properly noticed and conducted non-judicial foreclosure on a super-priority assessment lien.

In Botelho, the Rhode Island Supreme Court was faced with “the novel question of whether a condominium foreclosure sale pursuant to the Rhode Island Condominium Act . . . extinguishes a prior-recorded first mortgage on the unit.” The trial court issued an opinion consistent with the belief of lenders and property associations for years, holding that the super-priority lien statute operated as merely a payment priority schedule, meaning the COA received the first right to be paid the excess proceeds after the lender foreclosed on its first security interest in the property. The Rhode Island Supreme Court disagreed. In reversing the lower court’s decision, the Court held that a super-priority lien foreclosure pursuant to Section 34-36.1 extinguishes a first mortgage on the subject property. In reaching its decision, the Court recognized that the statutory scheme can result in “a lien for relatively minimal condominium assessment fees nullifying a security interest on a much larger loan.” The Supreme Court acknowledged the “draconian nature” of the effects of its holding and that its decision was harsh. Nonetheless, the Court left no doubt that COAs in Rhode Island can acquire a true super-priority lien, a foreclosure on which may extinguish a first mortgage.

While the Botelho opinion is a negative development for lenders in Rhode Island, lenders do have an opportunity to preserve their security interests both before and following foreclosure of a super-priority lien. The Rhode Island Condominium Act requires a COA to send notice of the time and place of the sale to the holder of the first mortgage at least  20 days prior to publishing the notice of sale, and the statute also includes a right of redemption in favor of the first mortgagee. Specifically, within seven days following a COA sale, the COA must provide written notice to the first lien holder identifying the highest bidder and the amount of the bid. Within 30 days of receipt of that post-foreclosure notice, the holder of the first mortgage or deed of trust can preserve its senior interest in the property by paying the COA all assessments due on the unit, together with all attorneys’ fees and costs incurred by the association in connection with the collection and foreclosure process. While the 30- day redemption period is a quick turnaround, this right of redemption may protect lenders conducting business in Rhode Island. It is also important to keep in mind that unlike Nevada and certain other states where the super-priority statute applies to homeowners’ associations, the Rhode Island statute is applicable to condo associations only.