NH Supreme Court issues key condo financing ruling

Justices back lenders in case over foreclosure-related assessments

Sales of condominiums in New Hampshire continue to rise. According to data published by the NH Association of Realtors, sales through September increased 6.9 percent over 2015, on top of 16 percent growth the year before. Meanwhile, average days-on-market for condos has decreased and growth of new listings is nearly flat. These metrics send a clear message: Condominiums remain a popular housing choice. Demand is high, supply is low, and buyers need to be prepared to act.

A crucial pillar of this growth, and necessary for increasing supply, is condominium mortgage financing. A 2015 Superior Court order put access to financing in danger, but a recent decision by the NH Supreme Court reversed that ruling and that threat has been removed.

In NH Housing Finance Authority v. Pinewood Estates Condominium Association, the question was whether a foreclosing mortgagee could be held liable for the unpaid assessments incurred by a prior delinquent owner. The NHHFA had acquired, in a foreclosure sale, title to a condominium unit with substantial unpaid assessments that had been accrued by the prior owner.

The NHHFA paid all assessments incurred after taking title, but the homeowner association, citing its condominium documents, refused to restore common services to the unit until the debt of the prior owner was satisfied. The superior court, relying on the association’s bylaws, ruled that the association could continue to withhold services, effectively creating a lien against the unit.

The Superior Court’s ruling was significant, as it upset a balance between the rights of associations and mortgagees that had been crafted by the Legislature in 2010. Under that law, a homeowner association could gain a priority lien for six months of unpaid assessments if the association took certain steps to collect and provide notice to the mortgagee.

That legislative solution gave associations a useful tool to collect unpaid assessments. It also ensured lenders that a mortgage interest will not be unreasonably impaired as a result of unpaid condominium assessments. Together, this balance encourages all sides to act diligently in responding to delinquent owners, and ensures that condominium mortgages originating in New Hampshire are capable of being sold on the secondary market.

In its recent decision, the Supreme Court recognized the legislative balance. An association’s bylaws must be interpreted consistent with the statute, and a foreclosing mortgagee takes title free and clear of all encumbrances, including unpaid pre-foreclosure assessments beyond the six months specified in the legislation.

The court explained that “[i]f an association could withhold services from the unit post-foreclosure in order to force the post-foreclosure owner to ensure that the debt of the previous owner is paid, an association would have an ongoing encumbrance on the unit that exceeds that authorized by the act.”

This ruling recognized arguments put forward by the NHHFA, which stressed the importance of preserving the 2010 legislative balancing of interests, and which were supported by the NH Bankers Association, Cooperative Credit Union Association and the Mortgage Bankers and Brokers Association of New Hampshire, which filed briefs in the appeal.

In reaching its decision, the Supreme Court stressed that “[t]he ability of a condominium owner to readily secure mortgage financing is crucial to the viability of the condominium form of ownership.” The court’s decision ensures that financing remains available.

The current balancing of interests set forth in the condominium statute, and preserved by the court’s holding, gives lenders a clear understanding of the risks involved in extending condominium mortgage financing. This result protects the interests of not just lenders, but also existing associations, unit owners and developers. It also ensures continued growth and availability of condominiums in New Hampshire.

As the Supreme Court noted, “[l]enders make loans based upon their calculations of risk and return, and paramount in that calculation is the priority position of their lien”; any future efforts to address the balancing of interests between associations and lenders must be mindful of this. Based on the balanced statute, now affirmed by the Supreme Court, condominium unit owners, buyers and associations can be assured that mortgage financing remains widely available. 

Robert J. Dietel, an attorney with Gallagher, Callahan & Gartrell, Concord, represented the NH Bankers Association, Cooperative Credit Union Association and Mortgage Bankers and Brokers Association of New Hampshire Inc. in NH Housing Finance Authority v. Pinewood. He can be reached at dietel@gcglaw.com. Joshua L. Gordon, an appellate attorney, represented the NH Housing Finance Authority and argued the case in the New Hampshire Supreme Court. He can be reached through AppealsLawyer.net.