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04-19-16_e-LawLinesThe Missouri Court of Appeals was recently presented with a case where the issue was whether the Missouri Condominium Act, the condominium’s declaration or its by-laws controlled a particular matter. The case of The Ventana Owners Association, Inc. v. Ventana KC, LLC, presented the situation where the by-laws of the condominium association expressly provided that where ownership of a condominium unit is transferred by foreclosure, while any unpaid assessments are to continue to accrue, the “Unit and Owner acquiring title … shall be subject only to the lien of assessments which become due after such transfer of title.”

The defendant in that case, Ventana KC, LLC, had acquired 55 units in The Ventana through foreclosure on May 14, 2013. The deed upon which Ventana KC foreclosed had been recorded in July 2009 and by its terms was a “construction mortgage.”

In September 2013, the Ventana Owners Association initiated a statutory lien foreclosure action, alleging that the Association had a statutory lien on the 55 units owned by the defendant due to delinquent assessments totaling $22,879.50. The outstanding assessments had arisen in the approximate six-week period immediately preceding the transfer of the title to Ventana KC through foreclosure.

The defendant, Ventana KC, moved for summary judgment, relying upon the first above-quoted provision, which was Section 9.6 of the by-laws. While the trial court agreed with the defendant’s position, the Court of Appeals went back to the source for condominiums — the applicable Condominium Act1 — as condominiums are creatures of statute and thus derive all of their rights from the applicable statutory framework.

A Missouri statute then in force regarding liens for assessments provided that such “[a] lien pursuant to [Section 448.3-116 RSMo 2000] is prior to all other liens and encumbrances of a unit.”

The court reaffirmed the purpose and the importance of the statutory framework, noting that such “status exists for assessment liens because an association’s assessments contribute to the maintenance of the common elements and the value of the entire condominium.”

But the court also noted that four exceptions exist under the statute under consideration in Ventana.

  1. Liens and encumbrances recorded before the recordation of the declaration;
  2. A mortgage or deed of trust for the purchase of a unit recorded before the date on which the amount sought to be enforced became delinquent;
  3. Liens for real estate taxes and other governmental assessments or charges against the unit; and
  4. Except for delinquent assessments or fines, up to a maximum of six months’ assessments or fines, which are due prior to any subsequent refinancing of a unit or for any subsequent second mortgage interest.

The court found that By-Law Section 9.6 “[e]ssentially created an additional exception to the priority status of an association’s lien where a transfer of title occurs due to foreclosure.” Such an expansion of the exception to the priority of the condominium association’s liens “would extinguish the statutory lien the Association otherwise would have had on the 55 units, because under the By-Laws, foreclosure is no longer a remedy to collect these particular delinquent assessments.”

The appellate court noted that Section 448.2-103.1 RSMo provides that “[a]ll provisions of the declaration and bylaws are severable.” Furthermore, subsection 3 of that section states that “[i]n the event of a conflict between the provisions of the declaration and the bylaws, the declaration prevails except to the extent the declaration is inconsistent with sections 448.1–101 to 448.4–120.”

While the appellate court found that The Ventana’s declaration of condominium substantially complied with the Missouri Uniform Condominium Act, it also found that the condominium association’s by-laws conflicted with the statute. It is that conflict, the removal of the Association’s right to collect assessments via enforcement of a lien therefor, which gave the court pause and ultimately caused it to find that Section 9.6 of The Ventana’s by-laws was in conflict with the statute.

The court also examined whether the mortgage or deed of trust on which Ventana KC foreclosed constituted one of the exceptions to the priority of the lien. Reviewing the words in the deed of trust, which expressly stated that it was for “construction financing” and not for the purchase of the units, the court found that the deed of trust did not satisfy the second exception to the lien priority statute. Thus, the appellate court reversed the grant of summary judgment in favor of Ventana KC, LLC, and remanded the case back to the trial court for further proceedings, working to ensure compliance with the applicable statutes and governing documents.

While condominiums have their own statutory framework, subdivisions do not, but all organizations, whether nonprofit or unincorporated, have their own further regulations which make construction and interruption of governing documents all the more challenging.

[1] The Condominium Property Act applies for condominiums prior to September 28,1983, and the Uniform Condominium Act applies for condominiums created on and after that date.