NJ Appellate Division Holds That HOA Declaration Trumps Prior Recorded Mortgage In Certain Instances – Financial Services

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The New Jersey Appellate Division, in a published opinion,
recently held that in certain instances, a recorded homeowners’
declaration of covenants can trump a prior mortgage.
See Fulton Bank of N.J. v. Casa Eleganza,
, 473 N.J. Super. 387 (App. Div. 2022). In Casa
, Plaintiff Fulton Bank of New Jersey
(“Plaintiff”) acquired title via mortgage foreclosure
sale to a portion of the residential community Iron Gate at
Galloway (“the Property”). The defaulted mortgage
Plaintiff had foreclosed on was originally recorded on June 8,
2007, following which, on June 25, 2007, the Irongate at Galloway
Homeowners’ Association (the “HOA”) recorded a
Declaration of Covenants (the “HOA Declaration”)
encumbering the Property.

Plaintiff sold the Property to a third party. However, at
closing, the HOA demanded that Plaintiff pay it $12,651.35 for
capital contributions, HOA fees, legal fees, and unpaid landscaping
bills that had been incurred during the time Plaintiff held title.
Plaintiff refused to pay and moved to “divest” the land
from the HOA’s covenants, contending that the HOA had no
ability to seek these damages as the HOA Declaration had been
recorded after the recording of the
original mortgage. Plaintiff argued that as New Jersey is a
“race–notice” jurisdiction, only the terms of the
original mortgage could govern, and the Property thus had to be
treated as unencumbered by the HOA Declaration’s

Plaintiff’s action was dismissed by the trial court, which
refused to discharge the sums owed by holding that such an outcome
would be inequitable and antithetical to the purpose and
characteristics of common interest communities and homeowner
associations. The matter then proceeded to the New Jersey Appellate
Division where the dismissal was affirmed, again in reliance upon
the unique nature of common interest communities, but also upon the
“equitable subrogation” doctrine.

In doing so, the Appellate Division first observed that common
interest communities–like Iron Gate at
Galloway–constitute a unique class of real property
ownership, as they are designed to diffuse property maintenance and
upkeep expenses among the community at large, ensure certain
standards and uniformity of behavior amongst owners, and assist in
preserving property values. The Court noted that to make this
ownership concept possible and ensure its continuance, it was
necessary that properties located within these communities were
able to be subjected to declarations which ran with the land in
perpetuity and bound both current and future owners.

While New Jersey employs a “race-notice” approach to
the recording of property interests, the Court nevertheless held
that the HOA Declaration was operative and bound the Property
despite it having been recorded after the
original mortgage. In doing so, the Court noted in order to
effectuate and preserve the aforementioned common interest goals,
and in light of the fact the community would have never been
approved by the township in the first place absent the creation of
the HOA, the Court held that equity demanded a modification of the
normal sequence of priority and the enforcement of the HOA
Declaration. The Court also held this outcome was necessary to
prevent innocent property owners from suffering the consequences of
the unpaid HOA bill, as Plaintiff could not be permitted to force
itself into a position “better than any other purchaser
responsible for assessments and HOA responsibilities during a
period of ownership.”

In so holding the Court relied upon the concept of
“equitable subrogation,” a doctrine which, although
“rarely applied,” allows a court to “alter the
ordinary sequence of priority to satisfy principles of equity”
when payment of another creditor’s debt puts another creditor
or a property owner in a more advantageous priority on a property
than the creditor/owner normally would have been.
See Sovereign Bank v. Gillis, 432
N.J. Super. 36, 44 (App. Div. 2013); U.S. Bank Nat’l
Ass’n as Tr. v. Deely
, 466 N.J. Super. 387, 397 (App.
Div. 2021). The principle rests on unjust enrichment grounds.
Likewise, the Court reasoned that here the Plaintiff knew it was
foreclosing on a property in a common interest community.


Despite New Jersey being a race-notice jurisdiction, a court
still retains significant discretion and can look to modify
conventional sequences of priority in an effort to safeguard
principles of its perceived notions of equity, particularly with
regard to common interest communities.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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