March 10, 2014

Welcome to the Neighborhood — Kentucky High Court to Determine Whether Lender is Obligated to Pay HOA Dues on Unimproved Property

The Supreme Court of Kentucky has granted discretionary review of a court of appeals ruling that a bank taking 51 subdivision lots by deed in lieu of foreclosure was not entitled to the developer's exemption for homeowners association (HOA) dues. In Woodlawn Springs Homeowners Assoc., Inc. v. Your Community Bank, Inc., the lower court had reasoned that the exemption was in consideration of the developer's construction of infrastructure, and since the bank had no such obligations, it was unfair to allow it to benefit from the exemption and avoid contributing to the maintenance of common areas and other expenses.

The case highlights the need for lenders in subdivision workouts to consider how to address continuing developer obligations such as infrastructure and warranty work. Condominium workouts also raise complex issues as creditors seek ways to realize value on the development rights for the yet to be constructed units.