Suppose you are a small community bank that, after months of default and incurring significant legal expenses, has just foreclosed on and purchased eight condominium units.[i] You reasonably expect that you now hold title to the condominiums in the same manner as the defaulted borrowers did on the date that the foreclosed deeds of trust securing their loans were recorded.[ii] However, as you prepare to incur even more expenses by bringing eviction actions to recover possession of the condominiums, you receive a letter from a condominium association demanding thousands of dollars for delinquent assessments levied against the defaulted borrowers – assessments including thousands more claimed for interest, late penalties, recording costs, and attorneys’ fees incurred by the association.[iii] The association’s letter claims that, under the authority of subdivision covenants recorded before the deeds of trust, your bank is now “personally obligated” to pay these assessments.[iv] Does the association have a leg to stand on?
Unfortunately, they might.[v] Lenders foreclosing on condominiums often face lien priority issues stemming from pre-foreclosure assessments levied by condominium associations under the authority of subdivision covenants. These issues are often governed by Missouri’s Condominium Property Act,[vi] which generally favors the priority of liens for assessments. However, in recent years, the force of the Act’s special treatment of liens for condominium assessments has not been felt by many lenders, due to the Act’s inclusion of a grandfather clause protecting the priority of deeds of trust securing purchase money loans that were recorded before August 28, 2014.[vii] But the Act only expressly deals with the priority of liens.[viii] It leaves as an open question whether a subdivision covenant can make the purchaser of a condominium personally liable for delinquent assessments levied against prior owners.
The Missouri Court of Appeals’ recent decision in First National Bank of Dieterich v. Pointe Royale Owners’ Association, Inc. addresses one association’s attempt to do just this and, in effect, completely sidestep the Condominium Property Act.[ix] The specific subdivision covenant considered in the case provides, in part, that:
If Assessments have become delinquent, such Assessments shall bind such property in the hands of the then Owner, his heirs, devisees, personal representatives and assigns. The personal obligation of the Owner to pay such Assessments shall remain his personal obligation and shall pass to successors in title.[x]
The court’s analysis of this covenant suggests that carefully crafted language might indeed sidestep the Act’s protection of purchase money deeds of trust recorded before 2014. The court did not identify any absolute obstacles – such as a conflicting inviolable public policy – that would prevent such a result.[xi] Instead, the court’s analysis focused on fact-specific rules of interpretation.[xii] Specifically, the court reasoned that, like restrictive covenants generally, an affirmative covenant purporting to extend “personal liability to successors with no personal relationship to the original debtor” should be strictly and narrowly interpreted because such a covenant “would make such property less desirable to buyers and thus make it more difficult to convey the property.”[xiii] The court also observed that, like an ambiguous contract provision, unclear provisions of an ambiguous covenant are construed against the party that drafted it.[xiv]
In holding that Pointe Royale’s covenant was not sufficiently clear to make First National Bank of Dieterich[xv] liable for pre-foreclosure assessments, the Court of Appeals was critical of the fact that the covenant did not define the term “successors in title,” which had no standardized definition (e.g., by appearing in Black’s Law Dictionary) at the time that the covenant was recorded in 1986.[xvi] The court concluded that the term was ambiguous in the covenant, which used the term in a seemingly contradictory statement that “[t]he personal obligation of the Owner to pay such Assessments shall remain his personal obligation and shall pass to successors in title.”[xvii] Pointe Royale argued that this language was intended to impose “joint and several liability,” but the court questioned why the covenant did not use that well accepted term.[xviii] Construing the covenant narrowly, the court ruled that a reasonable person would not have interpreted it to make the reach of personal liability for delinquent assessments more expansive than the reach of liens against the property itself, which the court described as “the primary basis for an assessment” and which could only be encumbered by a lien when it was “in the hands of the then Owner, his heirs, devisees, personal representatives and assigns.”[xix]
First National Bank of Dieterich v. Pointe Royale Owners’ Association, Inc. leaves significant questions unanswered. Although the court ultimately decided that Pointe Royale’s covenant was too ambiguous to impose personal liability against a foreclosing bank for assessments levied against prior owners, the court’s analysis suggests that a better, clearly worded covenant could achieve such a result. Accordingly, the application of the Condominium Property Act can’t be taken for granted and subdivision covenants should be carefully analyzed in consultation with legal counsel in the early stages of a foreclosure.
[i] This hypothetical is based on the facts of First Nat’l Bank of Dieterich v. Pointe Royale Property Owners’ Ass’n, No. SD 33797, 2016 WL 3564205, at *2-3, --- S.W.3d --- (Mo. App. S.D. Jun. 29, 2016); see also generally Plaintiff’s Petition, First Nat’l Bank of Dieterich v. Pointe Royale Property Owners’ Ass’n, No. 11AF-CC00812 (Mo. Cir. Ct. Taney Cnty. Sep. 14, 2011), ECF No. 1.
[ii] See, e.g., Fields v. Millsap and Singer, P.C., 295 S.W.3d 567, 570 (Mo. App. W.D. 2009) (holding that a purchaser at a foreclosure sale acquires title “as it existed on the date [that] the foreclosed deed of trust was recorded”).
[iii] See First Nat’l Bank of Dieterich, supra note 1, at *3.
[iv] See id. at *2.
[v] See id. at *5 (“We do not hold in this opinion that an affirmative covenant cannot be written so as to obligate a subsequent purchaser for an assessment owed by a prior owner.”).
[vi] Mo. Rev. Stat. § 448.005 et seq. (2015).
[vii] Id. at § 448.3-116.
[viii] See id.
[ix] See First Nat’l Bank of Dieterich, supra note 1, at *4.
[x] Id. at *2 (emphasis added).
[xi] See id. at *5-7.
[xiii] Id. at *7 (citing Blevins v. Barry-Lawrence Cty. Ass’n for Retarded Citizens, 707 S.W.2d 407, 408 (Mo. banc 1986) (“[W]hen there is any ambiguity or substantial doubt as to the meaning, restrictive covenants will be read narrowly in favor of the free use of property.”)).
[xiv] See First Nat’l Bank of Dieterich, supra note 1, at *7.
[xv] Of note, First National Bank of Dieterich merged with First State Bank of Red Bud (the named plaintiff while the case was pending in the trial court) while the case was pending. See id. at *1 n.1.
[xvi] Id. at *5-6.
[xvii] Id. at *5 (emphasis added).
[xix] Id. at *7.