Thursday, December 20, 2007

Condominium unit title insurance (page3)

It should be noted that the insurance only deals with "present violations" as of the date of the policy. It is difficult to imagine how the violation of a restrictive covenant by the seller might result in loss or damage to the new purchaser or mortgagee.

Paragraph four in ALTA Condominium Endorsement Form 4, although seemingly applicable to loan policy coverage only, can actually be used for either form of policy. Paragraph four insures against loss or damage sustained by reason of: The priority of any lien for charges and assessments provided for in the condominium statutes and condominium documents over the lien of any insured first mortgage identified in Schedule A.22

The mortgage lien priority insured only deals with charges and assessments that were given priority by the applicable condominium statute. This usually involves the lien in favor of the condominium association for common expenses and charges. Underwriting requires an examination and understanding of the applicable statutory provision. Without attempting to review all of the statutes, both section 3-115(b) of the UCA and section 3116 of the UCIOA give the condominium association a lien on the unit for unpaid assessments and fines levied against the unit and give that lien a priority by stating that:

A lien under this section is prior to all other liens and encumbrances on a unit except (i) liens and encumbrances recorded before the recordation of the declaration. . (ii) a first security interest on the unit recorded before the date on which the assessment sought to be enforced became delinquent . . . and (iii) liens for real estate taxes and other governmental assessments or charges against the unit . . .23

The New York statute preserves the same priority for "a first mortgage of record," and also gives the same priority to a "subordinate mortgage of record" held by the New York Job Development Authority or the New York State Urban Development Corporation.24

Section 3-116(b)(ii) of the UCIOA contains similar provisions, except that the common expense lien is given a priority even over the first security interest "to the extent of the common expense assessments based on the periodic budget adopted by the association pursuant to Section 3-115(a) which would have become due in the absence of acceleration during the 6 months immediately preceding institution of an action to enforce the lien."25

Since the title policy speaks only as of its effective date, the Condominium Endorsement can only give mortgagee protection against the first six months of common expenses in a UCIOA state. Some title underwriters may even delete that risk by a modification of the coverage. A closing requirement usually requires satisfactory proof of payment of all common expense charges as of the policy date.

Because of the importance to the condominium of the ability to collect the common charges in order to provide the various services to the unit owners, some states have amended their condominium statutes to give the association a limited "super lien" that would even prime a prior unit mortgage. The argument made by the associations supporting such legislation has a certain validity with respect to large developments where the association performs many of the services that would normally be performed by a municipality.26 The argument that is made is that common charges should be in a category similar to local real estate taxes. No title insurer can provide protection against loss of priority to a future lien under such legislation.

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