Cooperative & Homeowners Association Law Firm

A Board’s Map To Successful Collection Of Common Charges And Assessments In Condominiums And Homeowners Associations

COLLECTIONS OVERVIEW

In order to successfully operate a planned community, payment of certain expenses associated with the operation, maintenance, and control of the association are required.  The Board creates a budget for these expenses, including proper reserve funding, and thereafter assesses the owners.  The obligation of the owners to make payment of these assessments and the liability for non-payment is found in the association’s governing documents.

If too many owners fail to make payment of their common charges and assessments, the association may be unable to pay its bills and keep the community running in the fashion and at the level the owners expect.  Whenever an owner fails to make payment, all other owners must pay that delinquent owner’s share.  As a result, Boards have little choice but to move forward against delinquent owners.  Failure to do so can be seen as a Board not satisfying its fiduciary obligation and affirmative duty to the community.

THE PROCESS

The Managing Agent

Anytime a unit owner fails to pay his/her monthly charges, a letter should be sent to the owner by the managing agent notifying him/her of the delinquency.  If by the third month no payment is received, the matter should be turned over to the association’s attorney.  This is also the point at which the Board should determine whether to use, if available, its “non-legal” collection tools.  These tools may include suspension of the rights of the owner to use the common areas and facilities.  Which tools a community has at its disposal are found in its governing documents.  These tools never include illegal actions such as the turning off of water or electric, which if done may cause the Board members to become personally liable and possibly fined by the local governing authorities.

 

The Attorney

Initial collection procedures

Upon receipt of a ledger showing the owner’s name and mailing address, the attorney will perform a limited title search to determine who the legal owner of the property is and whether there is a pending bank foreclosure action.  This search is necessary to ensure the proper name is used to prepare the lien, if necessary, and to give the bank, if it is foreclosing, notice of the association’s claim to any surplus funds in the bank’s foreclosure action.

Once this information is obtained, the attorney is required by the federal Fair Debt Collection Practices Act to send an initial letter to the owner advising that the collection matter is being handled by the attorney and what amounts are due, along with other legally required information.  On or about thirty days after this letter is sent, the attorney will reach out to the managing agent to inquire if payment has been made.  If full payment has not been made, including the attorney fees due for the initial letter, a second letter will be sent to the owner advising that the attorney will now be placing a lien upon the premises.  Simultaneously, the lien will be prepared and sent either to the Board or the managing agent for signature.

This initial timeline and procedure is a recommendation.  As with all decisions being made by the Board, it should be discussed.  After discussion, the decision of the Board should be communicated to the attorney for the Board.  Often a delinquent owner will make a partial payment toward the arrears.  In this event, the Board and the attorney will make a decision on whether to proceed with placing a lien upon the property based upon the total circumstances of the particular matter.

When a lien isn’t enough

Sometimes a lien isn’t enough to convince an owner to pay.  It may be that the owner doesn’t have the funds, or there may be a number of other reasons.  Whatever the reason is, in order to keep the community fiscally viable, the Board must continue with the collection effort.  When this is the case, the Board has two basic and different legal remedies: money judgment actions or foreclosure actions.  A third option is available to condominiums if the owner is renting the unit.  This option entails demanding that the renter pay his/her monthly rent directly to the Board.

The decision to foreclose or bring a money judgment action depends on numerous factors, all of which must be researched by the attorney who will then deliver a recommendation to the Board.  Sometimes neither path will be an option, and the Board may need to simply wait for a bank to foreclose.

A money judgment action will cause a lien upon the premises and will cover those assessments owed up to the time the action is brought only, requiring multiple and continuous actions.  In most cases, even after the judgment is awarded, there are no assets to be recovered nor are there any salaries to levy.  Despite this, a money judgment action provides the Board with a possibility of recovering arrears.  When a bank is foreclosing, a money judgment may be recommended.

When “non-legal” methods have failed, and a money judgment action is not a viable option, the Board should consider foreclosing on the association’s lien.

Fundamentals of a lien foreclosure action

If a foreclosure action is recommended, what are the stages and what should the Board expect?  The first stage we recommend is for a letter to be sent to the owner advising them that the Board has authorized the attorney to move forward with a foreclosure action.  This letter gives the owner another chance to either pay the arrears in full or to enter into a Board approved payment plan.  After this letter is sent and goes unanswered, the following are the basic stages of the foreclosure action:

  1. A title search is ordered to determine the proper and necessary parties to the action;
  2. A Summons and Complaint are drafted and sent to the appropriate Board member or the managing agent for verification;
  3. The Summons, Complaint and Notice of Pendency are filed with the Court;
  4. The Summons and Complaint are sent to the process server to be served upon the defendants;
  5. After the defendants are served and the statutory waiting time has elapsed, affidavits of default are drafted (or a summary judgment motion is drafted if a defendant has answered the Complaint) and sent to the Board member or managing agent for signature;
  6. Affidavits, notices of motion and other necessary court papers are filed with the court requesting a referee be appointed to compute the amount due;
  7. Upon appointment of a referee, a referee’s report of amount due is drafted, along with accompanying Board member or agent affidavits and sent to the referee for their signature;
  8. Upon receipt of the signed referee’s report of amount due, it is submitted to the court along with a proposed judgment of foreclosure;
  9. Once the judgment is signed, an auction date is arranged with the referee;
  10. An auction is held

A lien foreclosure action will typically take 12 to 18 months from commencement to the auction.

What happens after the foreclosure auction?

If there is a successful bidder at the auction, that bidder has 30 days to close on the property.  At the closing, the Board will be paid the amount due including legal fees.  Once the closing occurs, that bidder, as far as the Board is concerned, is the same as any other owner.

In the event no one bids at the Board’s foreclosure auction, the Board becomes the owner, subject to the mortgage.  At some time in the future, the bank will finish its foreclosure action and the Board will no longer own the premises.  In the meantime, the Board is free and encouraged to rent the premises.  Frequently asked questions concerning Board/community ownership of units include:

  1. Who is responsible for paying the taxes? If there is a mortgage on the premises, the bank usually continues to pay the taxes.
  2. Does the Board need to insure the premises?   The Board will need to obtain a property and liability insurance policy.
  3. What if the owner is still living in the unit after the foreclosure auction? It will be necessary to evict the owner.  This is common and your attorney will know how to address this issue.
  4. What if repairs to the property are necessary in order to make the property suitable for rental? A cost estimate should be obtained before expending any money on repairs.  Most of the time repairs are necessary, but the costs may be recovered through the rental proceeds.
  5. What if we don’t want to be landlords? Unfortunately, sometimes the only route to recover arrears is through the foreclosure and rental process.
  6. Who should we rent the premises to? The property should be listed with a real estate broker knowledgeable of the rental market and the Board’s requirements.
  7. Do we tell the renter about the bank’s foreclosure action?   When your attorney prepares the lease, he/she will add a clause in the lease advising the tenant of this possibility.  When the bank does eventually foreclose, these tenants are usually given time and money by the bank in order for them to move.
  8. Can we collect rent after the bank forecloses?  After the bank forecloses, the new owner of the property is responsible for making the monthly payments.  The bank is also not responsible for any arrears that remain.

It has been our experience that while foreclosing on and renting a unit is not the ideal solution, its benefits far outweigh any drawbacks. 

Not every foreclosure will result in recovery of all of the arrears.  However, every unit that is not foreclosed upon will continue to amass arrears.  If the community understands that the Board has a solid collection plan of action, which includes foreclosure, the common charges and assessments will be the first bill that is paid as opposed to the last.

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