Property Owners’ Association Foreclosure Process
Note: In 2013, the Texas Supreme Court issued a set of promulgated forms for use in expedited foreclosure proceedings under rule 736 of the Texas Rules of Civil Procedure. (See Misc. Docket No. 14-9047.) The legislation requiring the Texas Supreme Court to promulgate foreclosure forms related to Tex. Const. art. XVI, § 50(a)(6) loans (i.e., home equity, home equity line of credit, and reverse mortgages) did not specifically apply to POA foreclosures, but the Supreme Court’s Rule 736 Task Force recommended, and the supreme court adopted, a promulgated rule 736 POA application form. See Acts 2013, 83d Leg., R.S., ch. 1044 (H.B. 2978); Tex. Gov’t Code § 22.018. The comments in this chapter are based on rule 736, but the reader is advised to use the forms promulgated by the Texas Supreme Court (some of which, but not all, are referenced in this chapter). The forms can also be found on the Texas Supreme Court website at www.txcourts.gov/supreme. For additional information on the use of the promulgated forms, see G. Tommy Bastian, Rule 736 Promulgated Forms, in State Bar of Texas, Advanced Real Estate Drafting Course (2014).
Property owners’ associations (POAs), also known as homeowners associations, began to appear in the 1950s and 1960s as civic clubs or civic associations. Liens for assessments were sometimes created in the initial deeds of conveyance from the developer to the first owner of the lot. As time progressed, the assessment liens were placed in the deed restrictions or declaration for the POA. Today, any new residential development, whether it is a master planned community, townhome community, or other single family development, most likely will be subject to set deed restrictions that may be enforced by the POA.
To secure payment of assessments, dues, or other community-oriented charges, a declaration creates lien rights for the POA secured by owners’ lots within the community. Some declarations create the authority of the POA to exercise a power of sale, while other declarations are devoid of power of sale language. Those POAs with a power of sale have the option of using an expedited foreclosure process under rule 736 of the Texas Rules of Civil Procedure. If the POA does not have a specific power of sale, the traditional judicial foreclosure process should be used.
Lawyers practicing in this area should be aware that certain statutory prerequisites apply before a POA may initiate the foreclosure process. The prerequisites include certain statutory notices before turnover for collection, an opportunity to cure, and an opportunity to enter into a payment plan with the POA. Conditions precedent may also exist within the POA declaration and those must be satisfied before any foreclosure action or proceeding.
Additional statutory notice requirements apply after foreclosure. Foreclosed owners have a right of redemption whether a third party purchases the property, whether the POA purchases the property, or whether the sale was conducted judicially or pursuant to rule 736 of the Texas Rules of Civil Procedure.
§ 30.2Prerequisites to a POA Foreclosure
§ 30.2:1Alternative Payment Schedule
The Texas Property Code requires a POA composed of more than fourteen lots to adopt reasonable guidelines establishing an alternative payment schedule for assessments by which an owner may make partial payments to the POA without incurring monetary penalties. See Tex. Prop. Code § 209.0062(a). Monetary penalties do not include reasonable costs associated with administering the payment plan or interest. See Tex. Prop. Code § 209.0062(a). POAs are required to file the alternative payment schedule guidelines in the real property records of each county in which the subdivision is located. Tex. Prop. Code § 209.0062(d). Notwithstanding a POA’s failure to file these guidelines, owners have a statutory right to an alternative payment schedule. Tex. Prop. Code § 209.0062(e). While associations subject to section 209.0062 should have proper guidelines recorded in the real property records of each county in which the subdivision is located, compliance with section 209.0062 is not a condition precedent to seeking foreclosure of the association’s assessment lien. Tex. Prop. Code § 209.0062(e).
POAs must offer owners at least three months to make partial payments, but POAs are not required to offer a plan that extends for more than eighteen months from the date of the owner’s request for a payment plan. Tex. Prop. Code § 209.0062(b)–(c). POAs are not required to enter into a payment plan with an owner who failed to honor the terms of a previous payment plan during the two years following the owner’s default under the previous payment plan. Tex. Prop. Code § 209.0062(c). Additionally, POAs are not required to offer a payment plan to an owner after the period for cure described in section 209.0064(b)(3) of the Texas Property Code expires. See Tex. Prop. Code § 209.0062(c). POAs are not required to allow an owner to enter into a payment plan more than once in any twelve-month period. Tex. Prop. Code § 209.0062(c).
Any payments received by the POA from an owner shall be applied in accordance with the following priority: (1) delinquent assessment; (2) current assessment; (3) attorney’s fees or third-party collection costs related to assessments, or other charges that could provide the basis for foreclosure; (4) attorney’s fees incurred by the association unrelated to assessments; (5) fines assessed by the POA; and (6) any other charges. Tex. Prop. Code § 209.0063(a). If the owner is in default of the alternative payment schedule, the POA is not required to apply a payment in accordance with this priority. Tex. Prop. Code § 209.0063(b)(1). However, a fine assessed by the POA may not be given priority over any other amount owed to it. Tex. Prop. Code § 209.0063(b)(2).
A POA may not hold an owner liable for fees of a collection agent (the definition of which includes lawyers and law firms) without first providing certain notice by certified mail. Tex. Prop. Code § 209.0064(a)–(b). The notice must (1) specify each delinquent amount and the total amount due; (2) if the POA is subject to Property Code section 209.0062 or the POA’s dedicatory instruments contain a requirement to offer a payment plan, describe the options the owner has to avoid having the account turned over to a collection agent, including the availability of a payment plan; and (3) provide a period of at least forty-five days to cure the arrears before further collection action. Tex. Prop. Code § 209.0064(b).
Practice Tip: Although not expressly required by Tex. Prop. Code § 209.0064(a)–(b), it is recommended that the notice include a line-item copy of the owner’s statement showing every charge, fee, or cost levied to the account.
§ 30.2:3Foreclosure Prohibited in Certain Circumstances
Under section 209.009 of the Texas Property Code, a POA may not foreclose a POA’s assessment lien if the debt securing the lien consists of solely the following:
1.fines assessed by the POA;
2.attorney’s fees incurred by the POA solely associated with fines assessed by the POA; or
3.amounts added to the owner’s account as an assessment under Property Code section 209.005(i) or 209.0057(b–4). See Tex. Prop. Code § 209.009. Section 209.005(i) allows a POA to add an owner’s assessment account charges for the production of POA records. Tex. Prop. Code § 209.005(i). Section 209.0057(b–4) allows a POA to add to an owner’s assessment account any additional costs related to a recount of election votes beyond the initial amount paid by the owner to fund the recount process pursuant to section 209.0057(b–1). See Tex. Prop. Code § 209.0057(b–4).
§ 30.2:4Lienholder Notice and Conditions Precedent
A POA cannot file an application for an expedited foreclosure of the POA’s assessment lien or a petition for judicial foreclosure unless the POA has provided notice and opportunity to cure to subordinate or inferior lienholders. Tex. Prop. Code § 209.0091(a). The written notice must be sent certified mail to the address for the lienholder as shown in the deed records. Tex. Prop. Code § 209.0091(b). The notice must state the total amount of the delinquency giving rise to the foreclosure to any inferior or subordinate holder of a lien that is evidenced by a deed of trust. Tex. Prop. Code § 209.0091(a)(1). The lienholder is entitled to cure the delinquency before the sixty-first day after the POA mails the notice. Tex. Prop. Code § 209.0091(a)(2). Notwithstanding any other law, a POA may provide notice under section 209.0091 to any holder of a lien of record on the property. Tex. Prop. Code § 209.0091(c).
Practice Tip: Some POA declarations require notice to senior lienholders before the commencement of the foreclosure of the POA lien. Read the POA declaration carefully to ensure that this and other possible conditions precedent to foreclosure were satisfied.
Practice Tip: Poorly drafted subordination provisions often lead to questions as to whether or not certain liens are inferior or subordinate to the POA’s lien. If in doubt, send notice to the lienholder. Best case scenario: the lienholder pays the POA and its foreclosure is moot. Alternatively, the statutory requirements have been satisfied.
§ 30.3POA Foreclosure Using Application for Expedited Foreclosure under Texas Rules of Civil Procedure 735 and 736
Effective September 1, 2015, Texas Property Code section 209.0092(a) provides that a POA whose dedicatory instruments grant a right of foreclosure is considered to have any power of sale required by law which authorizes the use of the expedited foreclosure procedures under Tex. R. Civ. P. 735 and 736 to obtain the court order necessary to foreclose a POA assessment lien. See Tex. Prop. Code § 209.0092(a). However, expedited foreclosure is not required if the owner agrees in writing at the time the foreclosure is sought to waive expedited foreclosure, and a waiver may not be required as a condition of the transfer of title. Tex. Prop. Code § 209.0092(c).
Practice Tip: Waiver of the expedited foreclosure process saves money for both the owner and the POA. Consider adding a waiver provision to a payment agreement between the POA and owner. Note, however, that the waiver may only be agreed upon “at the time the foreclosure is sought.”
The only issue to be determined in a rule 736 proceeding is whether a party may obtain an order to proceed with foreclosure under applicable law and the terms of the loan agreement, contract, or lien sought to be foreclosed. Tex. R. Civ. P. 735.2.
Rule 736 provides the procedure for obtaining a court order, when required, to allow foreclosure of a lien containing a power of sale in the security instrument, dedicatory instrument, or declaration creating the lien, including a lien securing a POA assessment under section 209.0092 of the Property Code. Tex. R. Civ. P. 735.1.
An application for an expedited order allowing the foreclosure of a lien listed in rule 735 must be filed in the county where all or part of the real property encumbered by the loan agreement, contract, or lien sought to be foreclosed is located or in a probate court with jurisdiction over proceedings involving the property. Tex. R. Civ. P. 736.1(a). An application must be styled “In re: Order for Foreclosure Concerning [state: property’s mailing address] under Tex. R. Civ. P. 736.” Tex. R. Civ. P. 736.1(b).
Practice Tip: Rule 736.1(a) allows the application to be filed in a probate court that has jurisdiction. A quick search of probate filings may save time and money in the event the property sought to be foreclosed is in probate.
Practice Tip: Before an application for expedited foreclosure may be filed in a probate proceeding, review the applicable provisions of the Texas Estates Code to ensure compliance for presentment of claims and/or restrictions on pursuing foreclosure. (See chapter 403 for independent administrations and chapter 355 for dependent administrations.)
§ 30.3:3Contents of Application for POA Expedited Foreclosure
Rule 736.1(d) is detailed and specific as to the contents of an application for expedited foreclosure. Tex. R. Civ. P. 736.1. The name and last known address of both the petitioner and the respondent are required. Tex. R. Civ. P. 736.1(d)(1). A POA application must include each person obligated to pay the contract or lien sought to be foreclosed who has a current ownership interest in the property. Tex. R. Civ. P. 736.1(d)(1)(B)(iii).
Practice Tip: A spouse that is a grantor under a deed of trust should be included as a respondent within an application for expedited foreclosure. Even if the spouse is not a record title holder, a community property interest may exist given that the spouse is a grantor under a recorded deed of trust. The spouse should only be included as a respondent for this limited purpose, and the application should be clear in that the spouse does not have an obligation to pay the debt sought to be foreclosed through the application.
The application must—
1.include both the commonly known street address and legal description (Tex. R. Civ. P. 736.1(d)(2));
2.state that the lien to be foreclosed is a POA lien and include a statutory reference to section 209.0092 of the Texas Property Code (Tex. R. Civ. P. 736.1(d)(3)(A));
3.state the provision within the POA declaration creating the lien for assessments and any related charges secured by the lien (Tex. R. Civ. P. 736.1(d)(3)(B));
4.identify each person obligated to pay the lien sought to be foreclosed (Tex. R. Civ. P. 736.1(d)(3)(C));
5.state the number of unpaid scheduled payments, the amount required to cure the default, and the total amount required to pay off the lien, as of a date that is not more than sixty days before the date the application is filed (Tex. R. Civ. P. 736.1(d)(3)(E));
6.state that the requisite notice or notices to cure the default has or have been mailed to each person as required under applicable law and the lien sought to be foreclosed and that the opportunity to cure has expired (Tex. R. Civ. P. 736.1(d)(3)(F)) (This statement pertains to the statutory notice to junior lienholders under section 209.0091 of the Property Code and notice to the owner under section 209.0064 of the Property Code);
7.state that before the application was filed, any other action required under applicable law and the declaration of the POA was performed (Tex. R. Civ. P. 736.1(d)(3)(G)) (Any condition precedent contained within the POA declaration would be pertinent here);
8.conspicuously state that legal action is not being sought against the occupant of the property unless the occupant is also named as a respondent in the application (Tex. R. Civ. P. 736.1(d)(5)(A)) (If the petitioner obtains a court order, the petitioner will proceed with a foreclosure of the property in accordance with applicable law and the terms of the POA declaration. Tex. R. Civ. P. 736.1(d)(5)(B)); and
9.include an affidavit of material facts in accordance with rule 166a(f), signed by the petitioner, describing the basis for foreclosure, and attach a legible copy of (a) the pertinent part of the POA declaration or dedicatory instrument establishing the lien and (b) each notice required to be mailed to any person under applicable law and the loan agreement, contract, or lien sought to be foreclosed before the application was filed and proof of mailing of each notice (Tex. R. Civ. P. 736.1(d)(6)).
See form 30-1 in this chapter, Application for an Expedited Order Under Rule 736 on a Property Owners’ Association Assessment, as promulgated by the Texas Supreme Court. See also form 30-2, Affidavit in Support of Petitioner’s Application for an Expedited Order Under Rule 736, or, alternatively, the practitioner may use form 30-3, Declaration in Support of Petitioner’s Application for an Expedited Order Under Rule 736, both promulgated by the Texas Supreme Court.
Practice Tip: Failing to include all required contents will result in a denial of the application. Lawyers should create a checklist for the application to ensure that all required contents are included in satisfaction of rule 736.1(d).
Practice Tip: The affidavit of material facts does not have to be limited to one singular affidavit. It is acceptable to have one affidavit to prove up the pertinent part of the declaration and the amounts due and owing to the association and another affidavit executed to prove up the notices required to be mailed to the owner. The important thing is that each affidavit is executed by someone with personal knowledge of the facts contained in each affidavit. Although not expressly required under rule 736.1(d)(6), some practitioners choose to attach a certified copy of both the vesting deed and the POA declaration creating the lien to the application or affidavit of material facts under rule 736.1(d)(6). Others simply find it sufficient to attach noncertified copies of the vesting deed and POA declaration creating the lien to comply with rule 736.1(d)(6).
A citation directed to a respondent must be mailed to each respondent’s last known address stated in the application. Tex. R. Civ. P. 736.3(b)(1). A citation also must be mailed to the occupant of the property at the address of the property sought to be foreclosed. Tex. R. Civ. P. 736.3(b)(1).
POAs have the option of completing service in accordance with rule 736, rule 106, or in any other manner provided for petitions under the Texas Rules of Civil Procedure. Tex. Civ. Prac. & Rem. Code § 17.031.
Practice Tip: Rule 736.3(b)(1) requires service not only to the respondent but also to the occupant. A standard two-owner household requires three citations: one for each owner/respondent and a third citation for the occupant.
If the application for expedited foreclosure is served through the mail via the court clerk, any response to the application is due the first Monday after the expiration of thirty-eight days from the date the citation was placed in the custody of the U.S. Postal Service in accordance with the clerk’s standard mailing procedures. Tex. R. Civ. P. 736(b). Section 17.031 of the Texas Civil Practice and Remedies Code allows citations in a proceeding filed under Tex. R. Civ. P. 736 to also be served in accordance with Tex. R. Civ. P. 106 or in any other manner provided for petitions under the Texas Rules of Civil Procedure. Although the language of section 17.031 of the Texas Civil Practice and Remedies Code would arguably allow a petitioner to serve citations in a Tex. R. Civ. P. 736 proceeding strictly in accordance with Tex. R. Civ. P. 106 or 99, the reality is no district clerk will issue a citation in a Tex. R. Civ. P. 736 proceeding with an answer period other than the first Monday after the expiration of thirty-eight days from the date the citation is served. If a court, on motion, grants service of citations in a Tex. R. Civ. P. 736 proceeding by publication, the response deadline is on or before the Monday after expiration of forty-two days from the date of issuance. Tex. R. Civ. P. 114.
Practice Tip: When considering POA foreclosures, be aware that many judges prefer personal service rather than service through the mail by the court clerk. While service through the mail remains an option, check local rules or with court personnel before relying solely on service through the mail by the court clerk. Some courts may prefer to see personal service in addition to or in lieu of mail service.
A response must be signed in accordance with rule 57. Pro se respondents must sign the pleadings and state an address, telephone number, and, if available, telecopier number. Tex. R. Civ. P. 736.5(c); Tex. R. Civ. P. 57. The response may be in the form of a general denial except that the respondent must affirmatively plead—
1.why the respondent believes a respondent did not sign a loan agreement document, if applicable, that is specifically identified by the respondent;
2.why the respondent is not obligated to payment of the lien;
3.why the number of months of alleged default or the reinstatement or pay-off amounts are materially incorrect;
4.why any document attached to the application is not a true and correct copy of the original; or
5.proof of payment under rule 95.
Respondents are prohibited from stating an independent claim for relief within their response. Tex. R. Civ. P. 736.5(d). Rule 736.5(d) mandates a court to strike and dismiss any counterclaim, cross claim, third-party claim, intervention, or cause of action filed by any person in a rule 736 proceeding. Tex. R. Civ. P. 736.5(d).
Practice Tip: Be aware some judges will ignore the requirements of Tex. R. Civ. P. 736.5(d), which mandate a court to strike and dismiss any independent claim for relief within a party’s response. It is good practice to file a response and cite the prohibition to the claim filed and the requirement that the court must strike and dismiss the independent claim.
Practice Tip: It is important to get to know the courts in the counties you practice and whether they will grant foreclosures. Some courts do not like foreclosure as a remedy and will not grant a foreclosure, regardless of the rules. Understanding the views of the court regarding foreclosure as a remedy will help you to manage your client’s expectations and prepare for a potential alternative course of action.
Texas Civil Practice and Remedies Code section 154.028 creates a process for court-mandated mediation applicable in expedited foreclosure proceedings. If a response is filed, the court may order the parties to mediate, but only after a hearing is held. Tex. Civ. Prac. & Rem. Code § 154.028(a). A court may not order mediation without conducting a hearing. Tex. Civ. Prac. & Rem. Code § 154.028(a). Either the petitioner or respondent may request a hearing to determine whether mediation is necessary or whether an application is defective. Tex. Civ. Prac. & Rem. Code § 154.028(a). If the parties cannot agree on a mediator, the court will appoint one. Tex. Civ. Prac. & Rem. Code § 154.028(g). The parties share the cost of the mediator. Tex. Civ. Prac. & Rem. Code § 154.028(h). The parties can agree not to mediate. Tex. Civ. Prac. & Rem. Code § 154.028(i).
Practice Tip: If the POA is cost conscious, an appearance by telephone is permitted by Tex. Civ. Prac. & Rem. Code § 154.028. The court must send out a ten-day notice stating whether the hearing will be conducted via telephone and any instructions for contacting the court and attending by telephone. Cost savings should be weighed against the value of appearing before the court.
The court must not conduct a hearing on an application for expedited foreclosure unless a response is filed. Tex. R. Civ. P. 736.6. If a response to the application is filed, the court must hold a hearing after reasonable notice to the parties. Tex. R. Civ. P. 736.6. The hearing on the application must not be held earlier than twenty days or later than thirty days after a request for a hearing is made by any party. Tex. R. Civ. P. 736.6. At the hearing, the petitioner has the burden to prove by affidavits on file or evidence presented the grounds for granting the order sought in the application. Tex. R. Civ. P. 736.6.
If no response to the application is filed by the due date, the petitioner may file a motion and proposed order to obtain a default order. Tex. R. Civ. P. 736.7(a). See form 30-4 in this chapter, Default Order, as promulgated by the Texas Supreme Court. All facts alleged in the application and supported by the affidavit of material facts constitute prima facie evidence of the truth of the matters alleged. Tex. R. Civ. P. 736.7(a). The court must grant the application by default order no later than thirty days after a motion is filed if the application complies with the requirements of rule 736.1 and was properly served in accordance with rule 736.3. Tex. R. Civ. P. 736.7(b). The petitioner need not appear in court to obtain a default order. Tex. R. Civ. P. 736.7(b). The return of service must be on file with the clerk of the court for at least ten days before the court may grant the application by default. Tex. R. Civ. P. 736.7(c).
Practice Tip: When considering POA foreclosures, be aware many judges ignore Tex. R. Civ. P. 736.6, which states, “The Court must not conduct a hearing under this rule unless a response is filed,” and set a hearing even though at the hearing the court grants a default judgment.
The court must issue an order granting the application if the petitioner establishes the basis for the foreclosure. Tex. R. Civ. P. 736.8(a). Otherwise, the court must deny the application. Tex. R. Civ. P. 736.8(a).
An order granting the application must describe (1) the material facts establishing the basis for foreclosure, (2) the property to be foreclosed by commonly known mailing address and legal description, (3) the name and last known address of each respondent subject to the order, and (4) the recording or indexing information of each lien to be foreclosed. Tex. R. Civ. P. 736.8(b).
An order granting or denying the application is not subject to a motion for rehearing, new trial, bill of review, or appeal. Tex. R. Civ. P. 736.8(c). Any challenge to a rule 736 order must be made in a suit filed in a separate, independent, original proceeding in a court of competent jurisdiction. Tex. R. Civ. P. 736.8(c).
An order is without prejudice and has no res judicata, collateral estoppel, estoppel by judgment, or other effect in any other judicial proceeding. Tex. R. Civ. P. 736.9. After an order is obtained, a person may proceed with the foreclosure process under applicable law and the terms of the POA declaration. Tex. R. Civ. P. 736.9.
Practice Tip: As with a response citing an independent claim for relief, few courts will unilaterally dismiss a motion for rehearing, motion for new trial, bill of review, or other appeal after an order granting a Tex. R. Civ. P. 736 application is entered. It is good practice to file a response and proposed order to any postjudgment motion to prompt the court to swiftly strike and dismiss the motion challenging the Tex. R. Civ. P. 736 order.
If a respondent provides proof to the clerk of the court that the respondent filed bankruptcy before an order is signed, the proceeding under rule 736 must be abated so long as the automatic stay is effective. Tex. R. Civ. P. 736.10.
Practice Tip: A suggestion of bankruptcy should prevent the rule 736 proceeding from being dismissed for want of prosecution during the pending bankruptcy. Be aware that many courts will still set the matter for periodic status conferences for updates on the bankruptcy proceedings. Failure to respond can lead to the case being dismissed for want of prosecution regardless of the respondent being in bankruptcy and/or a suggestion of bankruptcy being on file with the court.
§ 30.3:11Independent Suit against POA
A proceeding or order under rule 736 is automatically stayed if a respondent files a separate, original proceeding in a court of competent jurisdiction that puts in issue any matter related to the origination, servicing, or enforcement of the contract or lien sought to be foreclosed before 5:00 p.m. on the Monday before the scheduled foreclosure sale. Tex. R. Civ. P. 736.11(a). The respondent must give prompt notice of the filing of the suit to the petitioner or the petitioner’s attorney and the foreclosure trustee or substitute trustee by any reasonable means necessary to stop the scheduled foreclosure sale. Tex. R. Civ. P. 736.11(b).
Within ten days of filing suit, the respondent must file a motion and proposed order to dismiss or vacate with the clerk of the court in which the application was filed, giving notice that the respondent has filed an original proceeding contesting the right to foreclose in a court of competent jurisdiction. Tex. R. Civ. P. 736.11(c). If no order has been signed, the court must dismiss a pending application for expedited foreclosure. Tex. R. Civ. P. 736.11(c). If an order granting the application for expedited foreclosure has been signed, the court must vacate the rule 736 order. Tex. R. Civ. P. 736.11(c).
If the automatic stay under this rule is in effect, any foreclosure sale of the property is void. Tex. R. Civ. P. 736.11(d). Within ten business days of notice that the foreclosure sale was void, the trustee or substitute trustee must return to the buyer of the foreclosed property the purchase price paid by the buyer. Tex. R. Civ. P. 736.11(d). The court may enforce the rule 736 process under chapters 9 and 10 of the Texas Civil Practice and Remedies Code. Tex. R. Civ. P. 736.11(d).
Practice Tip: Frivolous pleadings and claims cannot be used as a basis for an independent suit against the POA that would otherwise result in the dismissal or the vacating of an order under rule 736.
Practice Tip: The cause of action that qualifies to stay a proceeding or order under Tex. R. Civ. P. 736 is limited to those issues involving the origination, servicing, or enforcement of the lien to be foreclosed. Pay close attention to the claims raised in the respondent’s independent suit to ensure the claims satisfy the limitations of Tex. R. Civ. P. 736.11(a).
A rule 736 order does not alter any foreclosure requirement or duty imposed under applicable law or the terms of the lien sought to be foreclosed. After obtaining the order granting foreclosure, the sale must occur in accordance with the POA declaration and chapter 51 of the Texas Property Code. Tex. R. Civ. P. 735.2. A conformed copy of the order must be attached to the trustee or substitute trustee’s foreclosure deed. Tex. R. Civ. P. 736.12.
Texas Civil Practice and Remedies Code section 34.041 and Texas Property Code section 51.002 provide that a foreclosure sale must take place between 10:00 a.m. and 4:00 p.m. on the first Tuesday of a month or, if the first Tuesday of a month occurs on January 1 or July 4, between 10:00 a.m. and 4:00 p.m. on the first Wednesday of the month. See Tex. Civ. Prac. & Rem. Code § 34.041; Tex. Prop. Code § 51.002(a–1).
Information from the Winning Bidder: A winning bidder at a sale, other than the foreclosing mortgagee or mortgage servicer, shall provide the following information to the trustee or substitute trustee at the time the trustee or substitute trustee completes the sale:
(1)the name, address, telephone number, and e-mail address of the bidder and of each individual tendering or who will tender the sale price for the winning bid;
(2)if the bidder is acting on behalf of another individual or organization, the name, address, telephone number, and e-mail address of the individual or organization and the name of a contact person for the organization;
(3)the name and address of any person to be identified as the grantee in a trustee’s or substitute trustee’s deed;
(4)the purchaser’s tax identification number;
(5)a government-issued photo identification to confirm the identity of each individual tendering funds for the winning bid; and
(6)any other information reasonably needed to complete the trustee’s or substitute trustee’s duties and functions concerning the sale.
Tex. Bus. & Com. Code § 22.004(a).
If a winning bidder required to provide information under section 22.004(a) fails or refuses to provide the information, the trustee or substitute trustee may decline to complete the transaction or deliver a deed. Tex. Bus. & Com. Code § 22.004(b).
Receipt and Deed Required from the Trustee or Substitute Trustee: The trustee or substitute trustee must—
(1)provide the winning bidder with a receipt for the sale proceeds tendered; and
(2)except when prohibited by law, within a reasonable time:
(A)deliver the deed to the winning bidder; or
(B)file the deed for the recording.
Tex. Bus. & Com. Code § 22.005.
The trustee or substitute trustee must ensure that funds received at the sale are maintained in a separate account until distributed. Tex. Bus. & Com. Code § 22.006(a). The trustee or substitute trustee shall cause to be maintained a written record of deposits to and disbursements from the account. Tex. Bus. & Com. Code § 22.006(a). The trustee or substitute trustee shall make reasonable attempts to identify and locate the persons entitled to all or any part of the sale proceeds. Tex. Bus. & Com. Code § 22.006(b).
In connection with the sale and related postsale actions to identify persons with legal claims to sale proceeds, determine the priority of any claims, and distribute proceeds to pay claims, a trustee or substitute trustee may receive—
(1)reasonable actual costs incurred, including costs for evidence of title;
(2)a reasonable trustee’s or substitute trustee’s fee; and
(3)reasonable trustee’s or substitute trustee’s attorney’s fees.
Tex. Bus. & Com. Code § 22.006(c).
A fee described by section 22.006(c)—
(1)is considered earned at the time of the sale;
(2)may be paid from sale proceeds in excess of the payoff of the lien being foreclosed; and
(3)is conclusively presumed to be reasonable if the fee:
(A)is not more than the lesser of 2.5 percent of the sale proceeds or $5,000, for a trustee’s or substitute trustee’s fee; or
(B)is not more than 1.5 percent of the sale proceeds, for trustee’s or substitute trustee’s attorney’s fees incurred to identify persons with legal claims to sale proceeds and determine the priority of the claims.
Tex. Bus. & Com. Code § 22.006(d).
A trustee or substitute trustee who prevails in a suit based on a claim that relates to the sale and that is found by a court to be groundless in fact or in law is entitled to recover reasonable attorney’s fees necessary to defend against the claim, which may be paid from the excess sale proceeds, if any. Tex. Bus. & Com. Code § 22.006(e). Nothing in section 22.006 of the Business and Commerce Code precludes the filing of an interpleader action or the depositing of funds in a court registry. Tex. Bus. & Com. Code § 22.006(f).
§ 30.4Judicial Foreclosure of POA Assessment Lien
The plain language of rule 735.1 states that rule 736 may be used to allow foreclosure of only a lien “containing a power of sale” in the declaration creating the lien. Tex. R. Civ. P. 735.1. Rule 735.1 makes the expedited procedures of rule 736 available only when the lienholder has a power of sale but a court order is nevertheless required by law to foreclose the lien. Tex. R. Civ. P. 735.3, cmt. to 2011 change.
A rule 736 order is not a substitute for a judgment for judicial foreclosure, but any loan agreement, contract, or lien that may be foreclosed using rule 736 procedures may also be foreclosed by judgment in an action for judicial foreclosure. Tex. R. Civ. P. 735.3.
Even though a POA may have power of sale language in its dedicatory instruments, a POA may, in its discretion, elect to judicially foreclose pursuant to rules 309 and 646a, Texas Rules of Civil Procedure. See Tex. Prop. Code § 209.0092(d). Section 209.0092 does not affect any right a POA is authorized to use to obtain the court order necessary to foreclose its assessment lien. See Tex. Prop. Code § 209.0092(e).
With a few exceptions, the judicial foreclosure process for POAs is substantially similar to that for a note, mortgage, or other security instrument allowing for judicial foreclosure. See chapter 20 in this manual for general principles that may also be applicable to the judicial foreclosure process for POA assessment liens.
§ 30.4:2Foreclosure on Homestead
As an inherent part of the property interest, the purchase of a lot in a subdivision with deed restrictions carries the obligation to pay association fees for maintenance and ownership of common facilities and services. Inwood North Homeowners’ Ass’n, Inc. v. Harris, 736 S.W.2d 632, 636 (Tex. 1987). The remedy of foreclosure is an inherent characteristic of that property right. Inwood, 736 S.W.2d at 636.
In the Inwood case, the court noted that, while the remedy of foreclosure may seem harsh, especially when a small sum is due, the court is bound to enforce the agreements homeowners enter into concerning the payment of assessments. Inwood, 736 S.W.2d at 637. The court found that the POA is entitled to foreclose on homesteads of owners who have not paid their POA assessments. Inwood, 736 S.W.2d at 637. Even more so, the POA is entitled to foreclose when the property does not have the homestead protections. Inwood, 736 S.W.2d at 636.
§ 30.4:3Secured Charges per POA Declaration
The POA declaration is the road map for which charges may be included in a suit for judicial foreclosure. The Texas Supreme Court ruled that late fees and interest on unpaid assessments not covered by the POA declaration at issue, although charges supported by chapter 204 of the Texas Property Code, were not secured by the assessment lien established in the POA declaration and thus were not foreclosable. Brooks v. Northglen Ass’n, 141 S.W.3d 158, 170 (Tex. 2004). Thus, practitioners should analyze the POA declaration to see if all charges related to the failure to pay assessments are secured by the lien within the POA declaration.
Importantly, with respect to judicial foreclosures, practitioners should also ensure that proper evidence and testimony are presented at trial to support its claim of compensatory damages for unpaid assessments and related charges, as well as attorney’s fees incurred, and not rest on the fact that the assessment lien secures those charges. A recent judicial foreclosure case highlights the importance of this point. In The Parks of Deer Creek Homeowners Ass’n v. Hunter, No. 02-20-00406-CV, 2021 WL 3205054 (Tex. App.—Fort Worth Jul. 29, 2021) (mem. op.), the POA’s attorney failed to present testimony from the only witness called to establish the amounts due and owing. While the POA’s attorney introduced the POA’s ledger reflecting amounts claimed, the attorney failed to elicit testimony that the amounts claimed were still due and owing. Hunter, 2021 WL 3205054, at *2. In fact, the court of appeals remarked that the only guidance the trial court received on the specific amount owed for unpaid assessments came not from witnesses, but from the POA’s counsel’s opening statement. Hunter, 2021 WL 3205054, at *1. Practitioners should be prepared to adequately establish the predicates for business records and substantiate the amounts on any ledger introduced into evidence with testimony. Practitioners should consider whether they have the trial skills, experience, and knowledge sufficient to handle a judicial foreclosure action to conclusion. If not, perhaps they should consider filing expedited foreclosure actions.
§ 30.4:4Failure to Grant Foreclosure Is Abuse of Discretion
In Cottonwood Valley Home Owners Ass’n v. Hudson, 75 S.W.3d 601, 603 (Tex. App.—Eastland 2002, no pet.), the trial court entered a default judgment in favor of the POA but failed to grant foreclosure and denied the POA’s subsequent motion to modify the judgment. The appellate court noted that the POA’s declaration provided for recovery of interest, collection costs, attorney’s fees, and expenses in collecting delinquent assessments, and citing the Inwood case, the court found that the trial court abused its discretion when it did not grant the POA’s foreclosure of its lien. Cottonwood Valley, 75 S.W.3d at 603.
The Candlewood Creek case supports the notion that assessments and attorney’s fees incurred in the collection of assessments may not be arbitrarily reduced by a trial court. In Candlewood Creek v. Gashaye, No. 05-11-00380-CV, 2012 WL 3135721 (Tex. App.—Dallas Aug. 2, 2012, no pet.) (mem. op.), the POA’s covenants provided that the assessment obligation was secured by a lien. Additionally, the covenants provided for recovery of attorney’s fees, late fees, and interest. The owner fell into arrears with the POA and the POA filed a motion for summary judgment, seeking $1,545 in assessments and late fees and $2,500 in attorney’s fees and expenses. The owner failed to file an adequate response. The trial court declined to provide an order for foreclosure and awarded the POA $50 in assessments and no attorney’s fees, despite the owner’s failure to file an adequate response to the motion for summary judgment. The POA appealed. Candlewood Creek, 2012 WL 3135721, at *1.
The Candlewood Creek court noted that the covenants provided for payment of a monthly assessment, a foreclosure of the lien if the assessment was not paid, and recovery of attorney’s fees for such action. The court stated that “the trial court’s award of $50 under these circumstances was so contrary to the overwhelming weight of the evidence that the award is clearly wrong and unjust.” Candlewood Creek, 2012 WL 3135721, at *2. Further, the court reaffirmed the notion that a POA covenant is a contract between the parties, and Texas law permits the recovery of attorney’s fees on a breach of contract action. Candlewood Creek, 2012 WL 3135721, at *2.
As discussed in section 30.3:12 above, Texas Civil Practice and Remedies Code section 34.041 and Texas Property Code section 51.002 provide that if the first Tuesday of a month occurs on January 1 or July 4, the foreclosure sale must take place on the first Wednesday of the month. While the constable or sheriff is the noticing party of judicial foreclosure sales for POAs, it is important to note that these statutes could affect the actual date of the sale, and practitioners need to be aware that there may be exceptions to the widely understood “first Tuesday of every month” rule for foreclosure sales.
§ 30.5Postforeclosure Requirements
§ 30.5:1Redemption Rights of Owner and Lienholder
In addition to the normal statutory notices and procedures to conduct an expedited foreclosure of the POA lien, after the foreclosure of an assessment lien the POA must send written notice to the lot owner and lienholders of record in accordance with Texas Property Code section 209.010. Tex. Prop. Code § 209.010. This notice must be sent within thirty days after the sale, providing such parties with basic information concerning the right of the lot owner and lienholders to redeem the property. Tex. Prop. Code § 209.010.
Under section 209.011(b), the lot owner may redeem the property not later than 180 days after the date the POA mailed notice of the sale. A lienholder of record may not redeem the property before ninety days after the date the POA mailed notice of the sale and only if the lot owner has not previously redeemed the property. See Tex. Prop. Code § 209.011(b). To redeem property sold to the POA at foreclosure, the lot owner or lienholder must pay to the POA all amounts and costs listed in section 209.011(d). Tex. Prop. Code § 209.011(d). To redeem property sold to a third party other than the POA at foreclosure, the lot owner or lienholder must pay to both the POA and the third party all amounts and costs listed in section 209.011(e). Tex. Prop. Code § 209.011(e).
Practice Tip: When preparing the redemption notice to the lienholder(s), include the servicer of the mortgage. Mortgage servicers may be searched on MERS’s website at www.mers-servicerid.org/sis/.
§ 30.5:2Extension of Redemption Period
If a lot owner or lienholder sends by certified mail, return receipt requested, a written request to redeem the property on or before the last day of the redemption period, the lot owner’s or lienholder’s right of redemption is extended until the tenth day after the date the POA and any third-party foreclosure purchaser provides written notice to the redeeming party of the amounts that must be paid to redeem the property. Tex. Prop. Code § 209.011(m).
§ 30.5:3Redeemed Property Subject to Liens; Leases Subject to Redemption
Property that is redeemed remains subject to all liens and encumbrances on the property before foreclosure. Tex. Prop. Code § 209.011(k). Any lease entered into by the purchaser of property at a sale foreclosing an assessment lien of a POA is subject to the right of redemption provided by section 209.011 and the lot owner’s right to reoccupy the property immediately after redemption. Tex. Prop. Code § 209.011(k).
§ 30.5:4Affidavit of Nonredemption
After the redemption period and any extended redemption period provided by section 209.011(m) expires without a redemption of the property, the POA or third-party foreclosure purchaser must record an affidavit in the real property records of the county in which the property is located, stating that the lot owner or a lienholder did not redeem the property during the redemption period or any extended redemption period. Tex. Prop. Code § 209.011(n).
Practice Tip: The affidavit required by section 209.011(n) is easily overlooked. Create the affidavit immediately after the foreclosure sale with a reminder to execute and record upon the expiration of the redemption period.
§ 30.5:5Partial Payments during Redemption
If a lot owner makes partial payment of amounts due the POA at any time before the redemption period expires but fails to pay all amounts necessary to redeem the property before the redemption period expires, the POA must refund any partial payments to the lot owner by mailing payment to the owner’s last known address as shown in the POA’s records not later than the thirtieth day after the expiration date of the redemption period. Tex. Prop. Code § 209.011(l).
§ 30.5:6Constable or Sheriff Sales
The redemption rights of the property owner and the lienholder also apply if the sale of the lot owner’s property is conducted by a constable or sheriff as provided by a judgment obtained by the POA. Tex. Prop. Code § 209.011(p).
Practice Tip: Foreclosure sales of POA liens conducted by constables or sheriffs are also subject to the lot owner’s and lienholder’s rights of redemption. Statutory notice of the right to redeem under section 209.011 must be sent to the lot owner and lienholder even if a constable or sheriff conducted the sale. The statute does not require these officers to send the notice; the POA is required to comply.
§ 30.5:7Limits on Right to Transfer during Redemption Period
Any person who purchases the property at foreclosure may not transfer ownership of the property to anyone other than a redeeming property owner during the redemption period. Tex. Prop. Code § 209.011(c).
If before the end of the redemption period the property owner or lienholder fails to record a deed from the foreclosing purchaser stating that the property has been redeemed, the right of redemption is thereafter defeated by sale of the property to a bona fide purchaser or lender for value. Tex. Prop. Code § 209.011(g).
A third party buying the property at the foreclosure sale or from the person who bought at the foreclosure sale may “presume conclusively” that the property was not redeemed by the original property owner or lienholder unless the property owner or lienholder filed a deed from the foreclosing purchaser or affidavit evidencing the redemption in the public records, in accordance with the requirements of section 209.011(h). Tex. Prop. Code § 209.011(h).
§ 30.5:9Rental Income during Redemption
All rent and other income collected by the POA or a third-party purchaser from the date of the foreclosure sale to the date of redemption shall be credited toward the amount owed to the respective party to effectuate redemption in either section 209.011(d) or 209.011(e) of the Texas Property Code. Tex. Prop. Code § 209.011(i). In either instance, if there are excess proceeds, those proceeds shall be refunded to the lot owner. Tex. Prop. Code § 209.011(i).
Bastian, G. Tommy. “Foreclosure Conundrums.” In Advanced Property Owners Association Law Course, 2018. Austin: State Bar of Texas, 2018.
Cagle, Gregory S. “HOA Assessment Liens: Everything You Need to Know to Figure Out Your Head from Your Assessment Lien.” In Advanced Real Estate Law Course, 2012. Austin: State Bar of Texas, 2012.
Jackson, Rosemary B. “Drafting Covenants, Conditions and Restrictions Under the New Laws for Property Owners Associations.” In Advanced Real Estate Drafting Course, 2013. Austin: State Bar of Texas, 2013.
Markel, Marc D., and Brady E. Ortego. “Foreclosures by Property Owners’ Associations.” In Advanced Real Estate Law Course, 2017. Austin: State Bar of Texas, 2017.
Quade, Stephanie L., and Brady Ortego. “Beyond the Forms: Complying with the New Laws and Resolutions to Make Them Work.” In Advanced Real Estate Drafting Course, 2012. Austin: State Bar of Texas, 2012.