Clear, Consistent Collections Policies Can Keep Delinquencies Low and Community Spirits High

Published on: March 22, 2007

Spurred by headlines about hard-hearted, heavy-handed homeowner associations foreclosing on “helpless” homeowners to collect often miniscule unpaid assessments, lawmakers in several states have enacted measures limiting the authority of associations to use foreclosure, or the threat of it, to encourage delinquent owners to pay their fees and to recover unpaid assessments from those who refuse.

The negative headlines often obscure two essential points: Homeowners living in common interest ownership communities have an absolute obligation to pay their share of common area charges, and homeowner associations have (or should have) an absolute right to insist that they do so. This is not a complicated concept, but then few aspects of association governance are simple, and dealing with delinquent owners is certainly not one of them.

Owners fail to pay their common area fees for a variety of reasons. Most delinquencies result because owners encounter financial hardships – divorce, job losses, illnesses, or the like. But some excuses fall under the “dog ate my homework” category: “I thought the fee was included in the mortgage,” or “I thought I only had to pay that fee once a year.”

Of all the excuses we hear, the most annoying by far come from owners who refuse to pay because they are unhappy with the services they receive, because they object to decisions the board has made, or because they don’t like some members of the board. Owners should know, and the attorneys who sometimes advise them to withhold their payments most certainly should know, that the law, which isn’t clear on every point, is crystal clear on this one: Association fees are the equivalent of taxes. Owners can challenge the fees, but they have to pay them and continue paying them until a court agrees that the charges are improper. There is no legal right to withhold a common area assessment.

A Community’s Lifeblood

Courts in virtually every jurisdiction have reached that conclusion, most using variants of the language a Massachusetts court used in a 1992 decision (Prince v. Prosser): “A system that would tolerate the unit owner’s refusal to pay an assessment because the unit owner asserts a grievance, even a seemingly meritorious one, would threaten the financial integrity of the entire condominium operation. For the same reason that taxpayers may not lawfully decline to pay lawfully assessed taxes because of some grievance or claim against the taxing governmental unit, a condominium owner may not decline to pay lawful assessments.”

As this court and others have recognized, common fees are the lifeblood of a community association; collecting them is one of the board’s most important obligations, and dealing effectively with owners who do not pay is essential. As a practical matter, most owners recognize that they must pay their fees and do so on time and (usually) without complaint. But all communities either have had in the past, have now, or will in the future have owners who become delinquent, and they need to have in place a clear and consistent policy for handling these problems when they occur.

The association’s collections policy should be in writing and should be distributed periodically to owners so all are familiar with the details. Some owners fail to pay because they assume the board won’t expend much effort to collect and because they underestimate just how strongly other owners feel about ensuring that everyone pays their fair share of the community’s operation expenses. The policy should explain why it is important for all to pay their fees when due (some don’t understand the connection between the fees paid and the services the association is able to provide) and should make it clear that the board takes the collection policy seriously and will enforce it rigorously and consistently for all owners. The association’s policy should specify:

  • When payments are deemed delinquent
  • The charges applied to late payments
  • What steps the association will take and when if owners fail to respond to late payment notices
  • The owner’s obligation to pay attorneys’ fees and other costs related to the collection effort
  • The association’s right to foreclose if the delinquency is not cured.

If there is one cardinal collection rule, it is, “the sooner the better.” Boards are dealing with their neighbors and sometimes their friends, so there is an understandable tendency to proceed slowly – to give delinquent owners the benefit of the doubt in the hope that they will pay without the need for nasty notices or legal action. But smaller debts are easier to collect than larger ones and it doesn’t serve the interests of the association or the delinquent owner to let unpaid assessments, and the interest and other penalties related to them, accumulate to the point where the debt becomes impossible for the owner to pay. For that reason, boards should establish either a dollar cap or a time limit (we suggest no more than 60 days), after which a delinquent account is turned over to the association’s attorney. Boards should also monitor delinquencies closely, insisting on monthly reports from the manager and the association’s attorney summarizing the status of all past-due accounts.

Step by Step

A reasonable collections policy begins with a polite notice suggesting that perhaps the owner overlooked the payment, which is now overdue. If the owner doesn’t respond, a second equally polite but firm notice should point out that interest and fees are accumulating, and note that if the owner doesn’t respond, the board will turn the matter over to the association’s attorney, who will initiate formal collection proceedings. This notice should also explain that the owner will be responsible for any collection-related costs (including attorneys’ fees) that the association incurs.

You should document all communications with the owner; everything should be in writing. You want to avoid situations (and they are not uncommon) when the owner says that he/she “spoke with someone on the board — I don’t remember who it was — but that person told me not to worry about falling a little behind. I could just plan to catch up sometime next year.”

Because it can be uncomfortable for board members to ‘get tough’ with their neighbors, it is usually best to let the association’s manager, if there is one, handle discussions with delinquent owners. Board members should refer owners who want to discuss the problem to the manager and should not reach any agreements on the side. The same advice applies to both board members and managers when the delinquency is turned over to the association’s attorney. Board members who try to negotiate an agreement with the owner directly might not be aware of all the legal fees and other costs accrued to that point, and so could end up collecting less than the association is owed.

Considering Collection Agencies

Collection agencies will also handle delinquent accounts, but this is not usually the best alternative for community associations. Attorneys have an obvious vested interest in managing this process (and billing for the time they spend doing it). But where an attorney will usually charge an hourly fee, the collection agency will take a percentage of the amount collected, sometimes as much as half. Also, because collection agencies want to turn accounts around quickly, they won’t pursue the more difficult cases, preferring to write them off rather than spend the time and effort required to reach a settlement. The association’s attorney will be more persistent on the community’s behalf.

And because collection agencies are not staffed by attorneys, they cannot initiate a foreclosure or file suit against the owner personally. To pursue those or other legal remedies, most agencies would have to hire outside attorneys, adding those costs to their percentage share of any funds recovered and further reducing the cost-effectiveness of this mechanism for homeowner associations.

Liens and Super Liens

An association’s ultimate weapon in a delinquency battle is the threat to foreclose on the owner’s home. While some states have taken steps to limit the association’s collection power, others have enacted laws re-enforcing it. The Uniform Common Interest Ownership Act (UCIOA), adopted by many states, establishes a limited priority lien, also known as a “super lien,” ensuring the ability of communities to collect up to six months of delinquent fees by putting those sums ahead of all other claims, including the claim of the mortgage lender. This means if the lender forecloses and sells the property, the association collects its back fees first, before outstanding mortgages or any other claims are satisfied.

Massachusetts has not adopted the UCIOA, but an amendment to the state’s condominium statute, approved in 1993, establishes a comparable six-month priority lien for unpaid fees. And unlike the UCIOA, the Massachusetts statute also includes attorneys’ fees under the super lien umbrella, one of the few states (along with Connecticut, Rhode Island, New Jersey, and Alabama) to do so.

Bankruptcy Relief

Owners who fall behind on their common area fees are usually struggling to pay other bills. These problems can lead them to declare bankruptcy, which complicates the association’s collection process, although not nearly as much as in the past, thanks to the bankruptcy reform legislation enacted two years ago (known formally as the Bankruptcy Abuse Prevention and Consumer Protection Act).

A bankruptcy filing “stays” or halts actions to collect outstanding debts until the bankruptcy is processed and decisions are made about how much, if any, outstanding debts the debtor must repay. Under the old law, owners of property in common interest communities were required to continue paying their common fees after filing for bankruptcy as long as they continued to occupy the home or collected rent on the property. Many owners got around that obligation by moving out of their units and leaving them vacant, arguing that this relieved them of the obligation to pay post-petition fees.

The bankruptcy reform law closed this loophole by linking the payment obligation to ownership rather than occupancy of the property. The new language states that the liability for payments continues “for as long as the debtor or the trustee has a legal, equitable, or possessory ownership interest.”

Pleas and Sympathy

While associations must enforce their collection policies consistently, they do not have to be unsympathetic to the plight of owners who have encountered temporary financial problems. Boards must balance their sympathy for troubled neighbors with their fiduciary obligation to protect the interests of the association, but they have the discretion to work with delinquent owners, giving them more time to pay assessments or allowing them to establish payment plans to repay the amounts they owe. A couple of caveats are important, however:

  • Associations that offer a repayment plan option should offer it under the same terms to all owners who indicate a desire and an ability to repay their debt.
  • They should offer forbearance only as an emergency measure to owners who need temporary relief. You don’t want the repayment plan to become the equivalent of a line of credit for owners who fall behind repeatedly, or a safety net for owners who decide to take advantage of the extended payment option to finance a new car or a vacation, at the expense of other owners.
  • Owners who are on a repayment plan should be expected to stick to it. If they miss a payment, the collection process should begin immediately.

Getting (a little too) Tough

Associations seeking to expedite the collection process without incurring the costs involved in legal action, will sometimes consider ‘get tough’ measures, such as turning off the owner’s water or utilities. This strategy is permissible only if local and state laws and the association’s documents — the covenants, conditions, and restrictions, not the rules and regulations — allow it. But even if the association has the authority to block essential services, this is not a strategy we recommend, for several reasons:

  • The association might incur legal liability for illness, injury, or damage to the unit resulting from the shut-off of water or power.
  • The public relations damage will be immense. Stories about the association leaving a poor family in a cold, waterless apartment on Christmas Eve would fill the local papers and probably end up on national television news. No community wants this kind of publicity and the common interest ownership world certainly doesn’t need any more of it.

Another strategy associations should not consider is embarrassing delinquent owners by publishing their names in the association newsletter, on the Web site, in the minutes of board meetings, or other public venues. Privacy concerns and, again, the potential for legal liability (if an owner is reported incorrectly as delinquent), argue against this means of encouraging delinquent owners to pay.

There are other ways of exerting subtle and sometimes not-so-subtle pressure on delinquent owners, however. When associations are having board elections, I try to make sure someone in the audience asks all candidates if they have ever been behind in the payment of their fees, or are currently in litigation over that issue. This question, posed publicly, will almost always make anyone who hasn’t paid start to squirm. They’ll try to explain why they haven’t paid, but somehow, their excuses never sound very convincing when presented to an audience full of owners who have paid their fees and aren’t terribly happy about owners who haven’t paid theirs.

This public discussion also can send an important message to delinquent owners who aren’t running for office, encouraging them either to pay their fees or to contact the board or the manager and explain why they are unable to do so.