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Illinois Condominium Lien Property: What Encumbrances Does a Condo Lien Have Priority Over Under 765 ILCS 605/9(g)?

The Illinois Condominium Property Act, 765 ILCS 605/1 et seq. outlines the process for a condominium association to record a lien on a condominium unit when a unit owner is not paying its share of common expenses or fines. More specifically, 765 ILCS 605/9(g) of the Condominium Property Act provides that a condominium association has an automatic lien for unpaid common expenses and fines as well as interest, late charges, reasonable attorney fees and costs of collection incurred enforcing the condominium instruments (the declaration and the bylaws), rules and regulations of the board, or any applicable statute or ordinance. Whether or not a lien is recorded, one question that inevitably arises is: how does the condo association get paid when there are other recorded encumbrances on the unit?

Examples of common encumbrances on real estate in Illinois include mortgages, judgment liens, mechanic’s liens and federal or local tax liens. Under Section 765 ILCS 605/9(g) of the Condominium Property Act, a condominium association’s lien is senior to all other liens or encumbrances other than taxes and previously-recorded encumbrances. This is the case because Illinois is a “first in time, first in right” state whereby priority is generally determined by the recording date of the document. Although the priority of a condominium lien outside the mortgage foreclosure context (discussed below) has not been litigated very often in Illinois, an example of where a court found that a condominium association lien was senior to another interest includes a later-filed lien by the Department of Public Aid for medical assistance payments it made to a unit owner (Lake Hinsdale Vill. Condo. Ass’n v. Dep’t of Pub. Aid, 298 Ill. App. 3d 192, 193, 698 N.E.2d 214, 215 (2nd Dist. 1998)).

Even without this lien right, a condominium association may be able to assert a priority claim over a second, or junior, mortgage on a unit. To do this, two conditions must be met. First, the declaration or bylaws for the condominium cannot provide that a second mortgagee’s interest is senior to the lien rights of the association. Second, the second or junior mortgagee must have an Illinois mailing address. If both conditions are met, Section 765 ILCS 605/9(g)(2) of the Condominium Property Act allows a condominium association to claim priority over the second or junior mortgage if the association sends notice to this lender by certified or registered mail. The condominium association’s priority lien for assessments only applies for assessments that come due for the next 90 days after notice is sent. The condominium association can (and should) thereafter send subsequent notices to make sure that the largest portion of its claim is senior to the junior mortgagee. This procedure is not implemented very often for multiple reasons, including the fact that it is difficult to track all mortgagees on a particular unit and even finding the address of any mortgagee can be a difficult proposition especially as loans are sold or transferred on a consistent basis.

In many cases, if an assessment lien is recorded, the unit owner will simply pay the condominium association to have the lien removed, or the association will be paid if the unit is sold to a third-party. However, there are also instances where the delinquent unit owner is also not paying the mortgage(s) and a foreclosure suit arises. The condo association is a necessary party to any foreclosure suit because, in part, the lender will be looking to extinguish any lien rights of the association during the foreclosure process. If a foreclosure suit is filed, one of four things will happen: (1) the unit owner will redeem the debt or work something out with the lender which will involve the dismissal of the foreclosure suit; (2) the lender will take title to the unit through a deed-in-lieu of foreclosure or consent foreclosure; (3) the unit will be sold at a foreclosure sale and the lender will credit bid and take title to the unit; or (4) the unit will be sold at a foreclosure sale and the lender will be outbid at the foreclosure sale. These four options all have different impacts on an association’s lien and the amount the association can collect by way of its perfected lien.

If the unit owner redeems the debt or works something out with the lender, then, the condominium association’s lien will continue to remain on the unit. The condominium association can then continue to keep the lien on the unit, file its own foreclosure action, bring a breach of contract action against the unit owner, or file an eviction action.

If a lender with a senior mortgage forecloses on the unit and is the high bidder at a foreclosure sale, or if it takes title to the unit by a deed in lieu of foreclosure or consent judgment, that lender is responsible to pay the assessments from and after the first day of the month after the date of the foreclosure sale or the recording of the deed. However, the condominium association’s lien rights are extinguished in the foreclosure (and the payment of the required assessments by the foreclosing lender) and the only available remedy for the pre-existing outstanding amount would be to bring a breach of contract action against the now-former unit owner.  Similar rules apply in tax sales in Illinois, and a buyer of unpaid real estate taxes is generally not responsible for assessments incurred before the time that title is transferred.

If a lender with a senior mortgage forecloses on the unit and a third-party is the high bidder at a foreclosure sale, that third-party must pay the unit owner’s proportionate share of common expenses during the 6 months immediately preceding any action to enforce the collection of assessments. Before 2018, it was unclear exactly what an association needed to do to take an “action to enforce the collection of assessments” to be entitled to payment of these 6 months of assessments. That changed in June of 2018, when the First District Appellate Court issued its ruling in Sylva, LLC v. Baldwin Ct. Condo. Ass’n, Inc., 2018 IL App (1st) 170520, 106 N.E.3d 431. In the Sylva case, the condominium association had recorded a lien against the unit and sent a notice to the unit owner that assessments were due. The association demanded that the purchaser at the foreclosure sale pay the outstanding assessments, which it did under duress, and then brought an action seeking relief from the court to get repaid the amounts that were paid. The trial court agreed with the purchaser and said that because no lawsuit was filed by the condominium association against the unit owner, it was not entitled to recover 6 months of unpaid assessments from the purchaser at the foreclosure sale. The appellate court reversed the decision of the trial court and held that the recording of the lien, sending of a demand letter to the predecessor owner, and attempting to collect from the subsequent purchaser was enough to entitle the condominium association to 6 months’ worth of unpaid assessments. The court went further to identify that if the purchaser does not pay after demand from the condominium association, the association would have a “new” lien on the unit for this 6-month period, and later cases have even held that the association could look to evict the purchaser if payment is not made. See, e.g., Hometown Condo. Ass’n No. 2 v. Mohammed, 2018 IL App (2d) 171030, ¶ 12, 118 N.E.3d 1218, 1221.

Whenever a unit is being foreclosed upon, it is suggested that the condominium association hire counsel to appear in the foreclosure case and monitor the foreclosure proceeding. Not only will this provide valuable information as to when the responsibility to pay assessments will begin to run, but there is a chance that a purchaser at a foreclosure sale could be relieved of its responsibility to pay assessments. In 2018, the Second District Appellate Court held that a purchaser at a foreclosure sale was not put on notice of the condominium association’s claim–and did not have to pay 6 months of assessments—when the notice of the sheriff’s sale failed to identify the existence of an assessment obligation. Although the decision is unreported (Countrylane Condo. Ass’n v. Barghouthi, 2018 IL App (3d) 170630-U, ¶ 13), there is a chance that an attorney may have been able to catch the deficiency in the notice of sale and bring it to the attention of the lender’s attorney or the court to avoid this issue. In that case, the condominium association did nothing wrong, but the court held that it was unfair to force a third-party to pay for back assessments when it was not put on notice of the association’s lien before bidding on the property at the sale.

Another important issue that has been raised before the courts is what happens in the case of a special assessment, and whether a foreclosure extinguishes an association’s claim for any such unpaid assessments. The answer to this question will depend on the language of the documents as well as how the special assessment was levied. In Granville Tower Condo. Ass’n v. Escobar, 2022 IL App (1st) 200362, ¶ 35, the Court held that a foreclosure purchaser was liable to pay special assessments that were levied prior to the foreclosure sale and were allowed to be paid on a monthly basis by the unit owners. There, the foreclosure sale purchaser argued that the special assessment became due when it was first levied and, therefore, was extinguished by the foreclosure sale. The Appellate Court disagreed and stated that because the condominium association would not have a lien until the amounts were due and not paid, the association’s lien rights for monthly payments still due and owing were not extinguished by the foreclosure sale.

Although condominium associations need not record liens to preserve a claim, consideration should be given to recording a lien at an early stage of a delinquency due to the nature of Illinois’ “first in time, first in right” rule, and the specific provisions regarding payment of assessments if a foreclosure sale ultimately takes place. Additionally, as soon as a foreclosure sale occurs, it is critical that the condominium association contact the high bidder at the sale to seek to collect assessments and to inform that high bidder of the obligation to pay assessments moving forward. More times than not, the condominium association will be contacted by that bidder because the association’s lien is not extinguished unless “prompt” payment is made by the new owner of the condominium unit. Many times, a dispute will arise over the amount that is due and owing, and whether the payment made was prompt, and the assistance of an attorney may be needed. The attorneys at Hirzel Law can assist with necessary title work, drafting of liens and other collection activities on behalf of a condominium association to assist in obtaining the maximum recovery from unit owners and parties who take title to units by way of a foreclosure.

The attorneys of Hirzel Law, PLC focus their practice on condominium and homeowners association law in addition to real estate law. Our attorneys have extensive litigation and trial experience in state and federal courts involving commercial litigation issues and real estate matters. We stand by our clients, offering quality legal representation and promptly responding to our clients’ needs. Contact Hirzel Law online or call 312-552-7669 to learn how our Illinois attorneys can help.

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