REPEAT OFFENDERS

Published on: January 11, 2011

We are certainly many years into this recession.  Real estate prices continue to decline or have stabilized in some areas, but certainly have not rebounded.  More and more individuals have no equity in their homes.  The jobless rate continues to undermine the economy.  Lastly, and of course of most concern to our readers, condominium fee collections continues to be a problem.

Even with many years of experience behind us, we continue to see similar problems and similar questions arise regarding the collection process.  This article will address a few of the question that our clients frequently ask us.

The first concern is the repeat offender.  A unit owner does not pay their condominium fees for many months.  The Association contacts their attorney who puts in place the super lien.   More than likely at some point the lender pays the priority amounts.  Hopefully, this brings the account current.  The lender may not pay the late fees; however, the lender will pay the condominium fees and legal fees provided the account is not more than six months overdue.  I once again remind everyone there should be no special assessments during these lean economic times.  If the Association increases their budget with an increase in the condominium fees, those condominium fees are afforded priority status.  Special assessments do not have priority status.

Once the bank pays, what is the Association to do.  It is extremely simple yet mistakes often happen with these owners.  The problem is usually a simple miscommunication or misunderstanding.  Once the unit owner is again sixty days delinquent, the process of collecting the funds should recommence.

Sometimes the breakdown is the fact that the management company has noted in their accounting system that the unit owner is in collections.  That notation is not removed once the account is brought current by the bank.  The management company continues to believe the unit owner is in collections.  Unfortunately, the law firm which collected the super lien has closed their file as the account was brought current.  Management Companies and self-managed boards must remember that once an account is brought current, the process has ended.  The process must be restarted once the owner is sixty days behind.  The odds are that if the payment is made by the bank, the owner will continue to be delinquent.

We recommend that the entire process recommence, including the initial notice from the board/management company to the unit owner reminding them of their delinquency.  This should be the case even if there are old late fees remaining on the account.  As a side note, the old late fees should not be removed just because the bank has paid the priority lien.  The unit owner is still responsible for those late fees and a lien remains upon the unit until such time as the late fees are paid or the unit is foreclosed upon.

Condominium boards become very concerned with repeat offenders being able to get away with no payment over many months and even multiple years.  However, as in most cases the first mortgage holder is paying off the priority lien, boards should focus on the process of making sure that the collection action is proceeding and understand that we are living in unusual and difficult times.   Thank God that the Massachusetts legislature in the early 90’s enacted the super lien law.  This mechanism allows the Condominium Association to collect its outstanding fees and most lenders will make payment to avoid the Condominium Association foreclosing on the unit.  Although the Condominium Board will have the same unit owner on their receivable list month after month and year after year, if properly handled those fees will be collected; however, the board must keep a watchful eye on the account and make certain that the attorney is working on the case protecting the super lien.

Another question that appears to arise often is how does the Association put a lien for unpaid fees on a unit.  Under Massachusetts law a lien for unpaid fees arises automatically.  Once a fee is due, there is a lien for those fees.  However, I cannot stress enough that this lien is not a priority lien.  In order for the Association to have a priority lien, the Association must perfect that lien by having their attorney send out specific notices and file and record a lawsuit.  Without taking those steps the Association’s lien will be wiped out in the event of a bank foreclosure.  As we all know, bank foreclosures are prevalent and continue to be on the rise.  It is imperative that this priority lien is put in place prior to a foreclosure sale.  Therefore, any board or management company that receives any notification of a foreclosure sale should immediately contact their attorney and seek their advice.  Their attorney will be able to put in place the priority lien prior to the auction in most instances.  Many times our office has been contacted after the auction has occurred.  Unfortunately, at that point it is too late and the Association’s lien has been extinguished.  In those events, the only way the Association will be paid is if there is equity remaining in the unit.  As we all know, a large number of homes throughout the United States are under water.  In other words, there is no equity left after the foreclosure sale.  Although the owner still owes the debt, once their home is foreclosed upon they either file bankruptcy or it is not financially prudent for the Association to chase the owner for the debt.

The most powerful weapon the Condominium Association has and has always had is the power of its lien and the right to obtain a priority lien over the first mortgage.

Many clients ask us whether or not there are other means available to collect the unpaid funds.  There are other means; however, they are not financially worth pursuing due to the amount of the debt.  The only other method of collecting condominium fees which is worthwhile is the rent attachment provision of Chapter 183A.  Under that provision, the Association has the right to collect rents directly from the tenant after providing notice to the unit owner.  If a unit owner is twenty-five days overdue, the Association has the right to collect the rent.  Once again, this process should involve the Association’s attorney.  The attorney can send out a notice to collect the rent which also complies with the super lien notice provisions, thereby more efficiently collecting the funds as well as minimizing the costs to the Association and unit owner.  Of course, all of the legal expenses are ultimately the responsibility of the unit owner as the Association has the right to cross charge those legal fees to the unit owner’s account.

Lastly, many clients are still have the belief that if a unit owner files bankruptcy, the Association’s lien will be extinguished.  Again, this is not true.  The Associations lien for the unpaid condominium fees survives a bankruptcy filing.  If the Association receives a bankruptcy notice, they should again immediately contact their attorney to take all steps necessary to recover their funds.

Although an Association may not be able to recover late fees and fines, with proper planning and proactive management, all Associations in Massachusetts should be able to recover their condominium fees.   A unit owner may cause a cash flow issue for the Association, but in the end the Association should obtain all of its funds.  Therefore, Associations should budget for a cash short fall, so they can continue to operate.  Eventually delinquent fees will be collected and the Association will suffer no losses whatsoever.

If you would like further information please contact Richard Brooks at rbrooks@meeb.com or 781-843-5000 (106).