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CC&R “Subordination” Provisions and Lien Priority

In California, priority between competing liens on the same real property is usually determined by the “first in time, first in right” rule.

Under that rule, different liens on the same property have priority according to the time of their creation and “perfection” — i.e., recordation.  Once a lien is recorded, it provides constructive notice of its existence to all subsequent purchasers and encumbrances.  Thus, a lien recorded “first in time” generally has priority over any later-recorded lien.

But those default priority rules can be modified by recorded “subordination” provisions, as held by a recent opinion from California’s Fourth District Court of Appeal — Bear Creek Master Assn. v. Southern California Investors, Inc. (Order for publication here.)

Facts

In the early 1980s, Bear Creek, Ltd. developed the Bear Creek Development and a neighboring golf course property in Murrieta, California.  The Bear Creek Development included 620 single-family homes and townhomes.  The golf course property was adjacent to, but not part of, the Bear Creek Development.

In March 1984, the developer recorded a set of covenants, conditions, and restrictions governing the golf course property (“GCC&Rs”).  The developer also recorded similar covenants, conditions, and restrictions governing the Bear Creek Development (“BCC&Rs”), which were to be administered by the Bear Creek Master Association (“BCMA”).

The GCC&Rs required the golf course property owner to maintain the golf course property “in a clean and attractive condition,” and granted the BCMA the right to enter upon the golf course property in order to remedy its owners’ failure to maintain it.  The GCC&Rs also created a “claim of lien” against the golf course property in order to reimburse BCMA for certain future costs incurred in maintaining the golf course property.

In September 2013, Southern California Investors, Inc. (“SCI”) recorded a third deed of trust (behind first and second deeds of trust) against the golf course property, securing a $350,000 promissory note from the owners of the golf course property.

In August 2014, BCMA recorded an assessment lien against the golf course property securing over $171,000 expended by BCMA in replacing a parking lot and irrigation on the golf course property.  The assessment lien was not paid.

SCI foreclosed and purchased the golf course property at the trustee’s sale.  SCI contended that BCMA’s lien was junior and therefore extinguished by SCI’s foreclosure.  BCMA disagreed, and sued.

Trial court’s judgment

The trial court granted SCI’s motion for judgment on the pleadings, and entered judgment for SCI.

BCMA appealed.

Court of Appeal’s opinion

On appeal, BCMA made three arguments: first, that BCMA’s assessment lien was created and perfected at the time the GCC&Rs were recorded in 1984; second, that BCMA’s assessment lien may not have been perfected until 2014 but it “related back” to 1984; and third, that SCI’s lien was subordinated to BCMA’s assessment lien.

The Court of Appeal rejected the first two arguments, but agreed with the third.

As to the first argument, the court held that the 1984 GCC&Rs did not create or perfect BCMA’s 2014 assessment lien.  While the GCC&Rs did provide for a future, “inchoate claim of lien,” no actual, “fully-fledged” lien could be created or perfected against the golf course property until the claim of lien was reduced to an assessment lien and recorded.  And BCMA’s assessment lien was not recorded until August 2014.

As to the second argument, the court held that BCMA’s 2014 assessment lien did not “relate back” to the 1984 GCC&Rs.  The court acknowledged that under Civil Code section 2884, a lien may be contractually created to take immediate effect as security for obligations not then existing, but held that BCMA’s assessment lien here was not created, and did not become effective, until recordation in 2014.

But BCMA prevailed on the third argument due to the priority and subordination provisions in the GCC&Rs, which modified the default “first in time, first in right” rule.  Sections 3 and 4 of the GCC&Rs provided that an assessment lien “shall have priority over all liens or claims created subsequent” to the recordation of the GCC&Rs, except for tax liens and first deeds of trust.

Those provisions, the court held, “constructively notified SCI that any recorded assessment lien against the golf course property would have priority over SCI’s third deed of trust — even if the assessment lien was recorded after the third deed of trust was recorded.”

The GCC&Rs thus ensured that the development’s homeowners “will not have to live near a poorly maintained golf course property with no means of remedying the situation or of adequately securing certain costs incurred by BCMA in maintaining the golf course property.”

Lesson

The “first in time, first in right” rule usually prevails in priority disputes.  But that rule can be altered by priority and subordination provisions within recorded CC&Rs.

Lenders need to carefully check the chain of recorded documents to ensure the priority of their liens.

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