Michigan Court Confirms: Tax Foreclosure Sale Does Not Eliminate Obligation to Pay HOA Assessments
On May 12, 2000, the Michigan Court of Appeals issued an important decision in Lakes of the North Association v. Twiga Limited Partnership, clarifying that a Michigan tax foreclosure sale does not cancel the obligation to pay HOA assessments. This case is critical for condominium and homeowners association board members to understand, especially when dealing with delinquent accounts or foreclosed properties.
Background
In 1992, the State of Michigan acquired four lots in the Lakes of the North Association after a tax foreclosure sale. These lots were bid to the state due to unpaid property taxes and the absence of third-party buyers. After the redemption period expired, the state obtained absolute title, wiping out all prior liens, taxes, and special assessments.
Two years later, Twiga Limited Partnership purchased the lots from the state and refused to pay the HOA assessments levied by the Lakes of the North Association. Twiga argued that because the lots were acquired from the state after a tax sale—and all encumbrances had supposedly been wiped out—the association could no longer require payment of dues.
The Legal Question
The key legal issue in the case was whether HOA assessments, imposed through recorded restrictive covenants, qualify as an “encumbrance” under MCL 211.67, the statute that governs the effect of tax foreclosure sales in Michigan.
Twiga argued that since encumbrances are extinguished after a tax sale, the lots should be free of any HOA obligations.
The Court’s Ruling
The Michigan Court of Appeals disagreed with Twiga and upheld the trial court’s ruling in favor of the Lakes of the North Association.
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- HOA Assessments Survive Tax Sales: The court found that restrictive covenants requiring payment of assessments do not constitute “encumbrances” under MCL 211.67. Therefore, HOA dues still apply even after a tax foreclosure.
- Lien vs. Obligation: While an HOA lien for unpaid assessments may be extinguished by a tax sale, the obligation to pay assessments survives. This is because the duty to pay is rooted in the contractual and recorded restrictions, not in a lien alone.
- Public Policy Considerations: The court emphasized that deed restrictions, including HOA covenants, promote community stability and property values—important public policy objectives. These benefits outweigh the argument that properties are harder to sell due to such restrictions.
What Does this Mean for Community Association Boards?
Board members are often concerned about what happens when a unit or lot is lost in a tax foreclosure. The ruling in Lakes of the North Association v. Twiga Limited Partnership reinforces the principle that HOA assessment obligations, established through restrictive covenants, survive a tax foreclosure sale and are not considered encumbrances under MCL § 211.67. This decision confirms that even when a delinquent owner loses the property through a tax sale, the new owner still owes assessments moving forward—as long as the governing documents contain valid and enforceable assessment obligations.
In short: a tax sale clears liens, not responsibilities.
What Should Your Association Do?
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- Review Your Governing Documents: Ensure your declaration or master deed includes clear language about the obligation to pay assessments, separate from lien rights.
- Act Quickly on Delinquencies: Associations should not delay in pursuing collection of unpaid assessments, especially when a property is at risk of foreclosure.
- Track Ownership Changes: When a tax sale occurs, promptly update your records and begin billing the new owner for assessments.
- Consult Legal Counsel: If you’re unsure how to proceed after a foreclosure, it’s essential to seek legal advice to protect the association’s financial interests.
At Hirzel Law, PLC, we routinely assist condominium and HOA boards in navigating complex collection issues, including post-foreclosure recovery. Whether it’s developing proactive collection policies or enforcing assessment obligations, our team understands how to preserve your association’s financial health while staying within the bounds of Michigan law. If your community association is dealing with delinquencies, foreclosures, or post-sale collections, contact us today to navigate your collections issues!
