By: Lance T. Denha, Esq.
Home Owner Associations (“HOA”) all over the country are too feeling the pinch in the present economy. This economy has shifted the focus of many homeowners and caused many of these people to re-prioritize what expenses get paid first. Unfortunately, for the HOA, it’s not to them. What rights does the HOA have to enforce its rights?
HOA and Condominium Associations have the obligation to collect assessments. An association’s Board of Directors has a fiduciary duty to the owners within the community development to collect assessments and properly handle the association’s financial affairs. To comply with this mandate, the Board of Directors relies on the timely payment of assessments. If owners fail to pay lawfully imposed assessments as required, the Board must take action to secure payment from these delinquent owners. A comprehensive collections strategy that incorporates all of the tools in the association’s arsenal will efficiently and effectively deal with these issues.
The centerpiece of an effective assessment process is an administrative resolution setting forth the association’s policy on collection of delinquent assessments. This type of resolution is enacted by the Board of Directors and is made known to all co-owners. In either form, it is the association’s written statement of assessment enforcement practice. Its purpose is simple: to communicate to all owners exactly what actions the association will take to pursue delinquent assessments against homeowners.
Several methods are available to the Board to ensure their compliance with their duty to collect assessments. The Board should establish a collection policy and distribute this policy to all owners. The policy should include the amount of the unit or lot owners’ assessment and the due date. This policy should also include the consequences to the owners for failure to pay their assessments in a timely manner. Depending on the authority of the association’s governing documents, the association may assess late charges and/or interest against the delinquent owner. The Board may also choose to include information as to when the delinquent account is forwarded to the association’s attorneys for collection action and that all attorneys’ fees actually incurred by the association will be assessed against the owner, as provided in the association’s governing documents. Once the policy is distributed to owners, uniform enforcement is critical to the Board’s success. The Board should work with the association’s managers and attorneys to ensure uniform implementation of the policy.
Notice of Intent to Lien
The Notice of Intent to Lien is typically sent to the delinquent owner by the management company or, if the Association is self-managed, by the Association Treasurer. It serves as both a warning regarding the imminence of filing a lien against the unit and the final non-legal request for the co-owner to become current in payment of his assessments.
The recording of a lien against the Unit is the most important action the association can take. It secures payment of the delinquent assessments and acts as a “wake-up call” for the delinquent owner. Because there are strict and explicit requirements for a valid condominium lien or HOA Lien, the preparation, recording and service of the lien is best handled by the association’s legal counsel.
Foreclosure of the Condominium or Homeowner Lien
The most difficult decision made by an association board is directing legal counsel to begin foreclosure action on the condominium lien. Some associations prefer to wait until a certain minimum dollar amount of delinquency has been exceeded. This approach can create problems particularly where particular payments have been accepted. This writer recommends foreclosure action be keyed to a specific number of months of delinquency rather than a dollar amount.
The association must also decide whether to foreclose on the lien or to sue for damages. Foreclosure can be affected either by advertisement or by judicial foreclosure. Choosing the correct enforcement mechanism requires close analysis of the factual circumstances and is best left to the discretion of the association’s attorney.
Both judicial foreclosure and foreclosure by advertisement culminate with an advertised foreclosure sale, at which time the association normally bids in the total delinquency including legal fees, costs and interest. Throughout its process, the association and its counsel must keep diligent tabs on possible foreclosure action by the first mortgagee, bearing in mind that a first mortgagee foreclosure will “wipe out” the association’s position (unless the association redeems from the mortgagee foreclosure sale).
Collection of Deficiency Judgments
In many circumstances, there is insufficient equity in a unit and foreclosure may not make financial sense. The alternative is pursuing the co-owner for a deficiency judgment. However associations must understand that a judgment does not automatically translate into payment. The co-owner must be collectible and the association must affirmatively pursue collection action, by garnishment either of wages or bank accounts, or by attachment of non-exempt personal assets. Associations are advised to take preparatory action by maintaining copies of co-owner’s checks in their unit files and learning, if legally possible, employment information regarding co-owners.
For traditional associations, the timely filing of the association’s lien is critical to perfecting the association’s lien rights against the property. If past-due assessments are owed to the association and the association fails to secure its lien rights against the property by filing a lien, the property may be sold without the association getting paid. However it should be noted that if a lien superior to the association’s lien is foreclosed, the foreclosure will extinguish all other liens in the chain of title behind it, including the association’s lien. However, if there are excess proceeds from the foreclosure sale, the association may be paid from the overage at the sale.