Bank with actual knowledge of intent to create homeowners association bound by covenants even though the mortgage was recorded before the homeowners assocation declaration

An appellate court in New Jersey held that a bank that received a mortgage on a piece of property was bound by a later-recorded homeowners association covenants because it had actual knowledge that the developer planned to subject the property to the declaration. Fulton Bank of N.J. v. Casa Eleganza, 473 N.J. Super. 387, 281 A.3d 252 (N.J. App. Div. 2022). This was the case even though New Jersey had a race-notice recording act and the declaration was recorded after the mortgage was recorded. The court used the equitable doctrine of equitable subrogation to change the order of priorities to avoid injustice. Because the bank was subject to the covenants, it was obligated on foreclosure to pay past due fees to the association.

This result conflicts with the approach taken by the California Supreem Court in Riley v. Bear Creek Planning Committee, 551 P.2d 123 (Cal. 1976), which freed an owner from covenants filed after that owner purchased the property even though they owner was on actual notice that the developer planned to include the property in the development scheme and subject it to uniform covenants.

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