For many Arizona homeowners, fees related to a homeowners' association (HOA) are inevitable. Most homeowners dutifully hand over fees to their HOA when required, accepting that the fees necessarily come with owning a home in a planned community or condominium. In turn, the HOA maintains and improves roadways, common areas, and other features of the community. Homeowners and their lenders may not know, however, that failing to pay HOA fees can cause disproportionate losses for both. In fact, under Arizona law, both homeowners and lenders can lose their entire interest in a home if HOA fees are not promptly paid.

The Arizona legislature long ago provided homeowners' associations with a powerful means to collect fees. Under Arizona Revised Statute § 33-1807, the HOA of a planned community (and, under § 33-1256, a condominium association) automatically has a lien on a home for any unpaid assessment from the time it becomes due. In fact, the lien doesn't even have to be recorded to be effective. The lien may also include late payments for those assessments, collection fees, attorney's fees, and costs incurred with respect to the assessments. While this may be expected, homeowners and lenders may be surprised to learn that an HOA is authorized by statute to foreclose that lien once an assessment has been delinquent for one year, or the amount due reaches $1,200—whichever occurs first. That means a homeowner can lose his/her home, and potentially all the equity therein, just because he/she owes $1,200 in HOA fees, or has fallen behind on payment for more than one year.

Further, and of special interest to lenders and servicers in the secondary mortgage market, an HOA's statutory lien for assessments is subordinated only to (1) liens recorded before the HOA's declaration was recorded (and thus, before the home was even built); (2) a recorded first mortgage; and (3) liens for real estate taxes and other governmental assessments. (See A.R.S. § 33-1807.) This means that an HOA lien takes priority over all junior mortgages, even if that mortgage was recorded years before the homeowner ever missed an HOA payment.

To foreclose its lien, the HOA must initiate a foreclosure action in state court within three years after the lien arises. All parties with a subordinate interest in the property must be named as defendants in the action. If no party with a record interest redeems, and a foreclosure results, the homeowner loses all equity in the property, and all second mortgages and other junior liens are wiped out. If the property sells at the resulting foreclosure sale for more than the total amount of the HOA lien, excess proceeds may be generated and are distributed to the now-extinguished lienholders in order of lien priority. Those same lienholders must then file an Application for Excess Proceeds, which results in further cost and expense, often with little return.

Of course, once an HOA lien foreclosure action is initiated, the preferred outcome for lenders is that the homeowner satisfy the lien before the HOA forecloses. Moreover, most deeds of trust contain provisions requiring borrowers to maintain their HOA fees, or face an event of default. Thus, when a lender holding a junior mortgage is named in an HOA foreclosure action, a good first step is to demand that the homeowner cure his breach of mortgage agreement resulting from the HOA deficiency. Indeed, if the homeowner cures his breach with the HOA, the foreclosure action is usually dismissed, and the status quo is maintained.

If, however, the buyer fails to cure the default, despite demand, the junior lender essentially has two options. It can pay off the HOA lien itself and pass the costs onto the borrower per the terms of the deed of trust. By so doing, the lender protects its entire interest in the property from foreclosure. Alternatively, the lender can stipulate to lien priority, thereby avoiding a reputational default in the foreclosure and permitting the HOA to foreclose. The decision depends on a variety of factors, including the lender's lien position (which it may wish to verify with a title search or by obtaining a copy of the plaintiff's litigation guarantee), the outstanding loan balance, and the property's current value.

In sum, it is important that homeowners and lenders thoroughly understand the ramifications of failing to pay HOA fees in Arizona. Because Arizona law allows recovery of attorney's fees as part of HOA foreclosure actions, many lawyers focus on this niche market, making foreclosure actions readily available to HOAs. Thus, allowing HOA fees to remain unpaid can have disastrous consequences for homeowners and lenders alike.