Published on: April 26, 2020
By Richard Brooks
Condominium owners must pay their common area fees. This is not a stop-the-presses revelation. It is a statement of principle, embodied in governing documents and affirmed by countless court decisions over the past 25 years. But the coronavirus pandemic, which has tested so many assumptions, is also challenging this one.
As statewide and local shelter-in-place orders have shuttered businesses, unemployment rates have soared, reaching near-Depression-era levels. More than 73 million Americans – about 25 percent of the nation’s population – live in community associations, and it is reasonable to assume that many of them are among the millions of workers who have lost their jobs or seen their incomes reduced. Some will struggle to pay their bills, and many condominium communities will see an increase in delinquent common area payments as a result.
We’ve gotten many calls from condominium boards wondering how they should respond. Some have asked specifically if they should defer payments for struggling owners or forgive the payments altogether. While the instinct of these boards to help their neighbors is understandable and even admirable, the answer to this question must be no.
Condominium associations depend on common area fees to pay their operating expenses. If some owners don’t pay their fees, others will have to make up the difference. If delinquencies become widespread, associations may not be able to pay for utilities, insurance, security, maintenance, and other essentials. The community’s financial health may be weakened and its viability possibly threatened.
Boards can and should be compassionate. But their compassion for a few struggling owners can’t outweigh their fiduciary obligation to protect the interests of the community as a whole. That means boards must exercise their authority to collect the fees owners are required to pay.
Government responses to the pandemic have imposed some restrictions on what boards can do. The Massachusetts legislature recently enacted a temporary moratorium on evictions and foreclosure actions. The state Attorney General has issued an Order that similarly restricts legal actions to initiate lawsuits. We think that in both cases, the wording is broad enough to allow community associations to take the necessary steps to protect the priority lien that ensures their ability to eventually collect delinquent payments.
Patience is Possible
Boards can’t file a foreclosure action or threaten one under these temporary bans, but they can notify owners that they have failed to make required payments. They can also be patient – more patient than they would be in “normal” times. Certainly, owners should continue to receive late notices, preferably two, that now don’t threaten legal action. These notices give the owners an opportunity to pay. However, if payment does not arrive, you will have to contact us. Most boards can delay contacting us a little longer than usual, but they can’t wait beyond 90 days.
Waiving late fees and penalties and negotiating payment plans for delinquent owners are other options boards might consider ─ compassionate gestures that don’t threaten the association’s finances or impair its ability to enforce the priority lien.
We’re advising our clients to contact us before communicating with delinquent owners so we can ensure both compliance with the state law and the AG’s regulations and protection of the priority lien. Boards should also work to develop a pandemic collection plan. And they should encourage owners who anticipate financial problems to notify the board before they fall behind.
Easing Financial Pressures
There are other measures, unrelated to collections, that associations can consider to ease the financial pressure on owners. A few suggestions:
- Scrutinize the association’s budget. Identify discretionary expenditures that you can reduce or eliminate.
- Reduce non-essential services or eliminate them temporarily. If your community has a swimming pool, consider opening it later in the season, or not opening it at all, to reduce maintenance and employment costs.
- Reconsider the scope of services you consider “essential.” Do the grounds have to be mowed twice a week? Will once-a-week or even every other week suffice, at least for a while?
- Delay or cancel plans for non-essential construction or repair projects. A leaking roof has to be repaired but the refurbishment of the lobby can probably wait.
- Review existing contracts and try to delay the start date, the scope of the work, or both. Many service providers may be responsive to these requests. A management company that uses the same provider for multiple properties will definitely have leverage to bring to bear on these discussions.
- Consider borrowing from the association’s reserves. The additional funds may offset the temporary loss of income from owners who fall behind on their fees. But borrowing from reserves may also have tax ramifications which you should discuss with the association’s accountant.
- Consider skipping the annual contribution to the association’s reserves. This may have both financial and legal implications, which you should discuss with the association’s accountant and its attorney.
- Explore other revenue sources, for example:
- A bank loan or line of credit; or
- Government assistance. The federal government has launched a number of pandemic-related emergency loan programs. Whether community associations will be eligible for this assistance isn’t clear, but it is worth exploring.
The pandemic won’t affect all community associations equally. The impacts will vary based on a community’s location, demographic makeup and financial condition. But none will be immune; all will have to deal with the pandemic’s financial repercussions in some way.
Boards should communicate with owners. Explain what the association is doing to control expenses and protect the community. But also remind owners of their obligation to pay common area expenses and the consequences for other owners and the community if they fail to do so.
“We’re all in this together” has emerged appropriately as a pandemic mantra. But it also describes the philosophy condominium owners must embrace, not just during a crisis, but always.