Assessments are the life-blood of condo associations and HOAs. Yet only in a very fortunate few condo associations can collection of assessments be left to a laissez faire process. Most condo associations need to have a cohesive and consistent collection process to thrive and not merely survive.
This article deals not only with the process of collection of assessments, but also the philosophy of collections adopted by an association.
Whether they realize it or not, all associations adopt a collection philosophy. Some do it unwittingly and without realizing what they have adopted; others deliberate and consciously adopt a philosophy which tailor-fits their members and the community in which they all live. Collection philosophies run gamut from "associations are businesses and must be like businesses" to "collections are a messy matter perhaps if left alone, the goodhearted volunteers will pay enough to cover expenses." Most associations probably fall somewhere in the middle of the spectrum, but every association should periodically reexamine its collection philosophy.
One way of doing this is by preparing a TQM style mission statement. A sample mission statement of collection of assessments for one condominium association might look like this:
1. We want to collect as close to 100% of assessments as humanely possible.
2. We believe in constant communication with co-owners as the cornerstone of an effective collection policy.
3. The collection process should provide for graduated sanctions for untimely payments.
4. The collection procedure must be clearly and often communicated to all co-owners before there are delinquencies.
5. The collection procedure must be written and made a part of the governing documents of the condominium.
6. The collection procedure must be enforced in a consistent and uniform basis.
7. Co-owners must be treated with respect throughout the collection process.
This "mission statement" is for illustration only and not to promote any particular philosophy. But it is important for the association to look at itself and its members and put some thought into a mission statement or philosophy that both suits its members and will result in effective collection of assessments.
The centerpiece of an effective assessment process is an administrative resolution setting forth the association's policy on collection of delinquent assessments. Enacted by the board of directors and promulgated to all co-owners, the administrative resolution in sometimes incorporated into the Condo Association's Rules and Regulations. 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.
Since assessment resolutions will differ as associations' policies on assessment differ, there is no one universal resolution. A generic assessment resolution might provide the following:
1. Assessments are due on the first of the month.
2. After a 10 day grace period, late charges apply.
3. A notice of Intent to Lien is sent to owners more than 30 days delinquent.
4. A condominium lien is recorded against any unit owner more than 45 days late.
5. Acceleration of all assessments to end of fiscal year (if allowed in condo documents) for delinquencies of more than 3 months.
6. Lien foreclosure is directed for delinquencies of more than 4 months.
7. After institution of lien foreclosure action, all payment plans or settlements require board approval.
What is critical is that the resolution be memorialized, enacted by the Board, disseminated to all owners, and most important, that it be timely and consistently enforced.
Notice of Intent to Lien.
The notice of the intent to lien is normally 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 liening 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 condominium 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 the Condominium Act sets forth strict and explicit requirements for a valid condominium lien, the preparation, recording and service of the lien is best handled by the association's legal counsel.
The condo association and/or its management company can facilitate the lien preparation process by ensuring that each owner's unit file contain certain essential information, including: (1) Unit number; (2) Copy of the owner's deed; (3) Mailing address for owner of record (particularly if a non occupant owner); (4) tax identification number for the unit; and preferably (5) a clear unit ledger reflecting assessments, late charges and legal cost separately and identifying any payments maid by the owner as well as the current balance. Once prepared by the lawyer for the association, the lien must be timely recorded with the county register of deeds and served on the o-owner.
Acceleration of assessments.
Some, but not all, condominium documents provide the association the right to accelerate the balance of the fiscal year's assessments in the case of default. Where the documents do so provide, the association must consider the best way to exercise this significant power. If the collection process is designed to provide increasing sanctions for delinquencies, the seriousness of assessment acceleration must be weighed in deciding its timing. It is particularly essential that associations exercise acceleration of assessments on a constant basis (i.e., when a four-month delinquency exists).
Foreclosure of the condo 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 condo lien or to sue for damages only in district court. Foreclosure can be effected 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 counsel.
Each process has advantages and disadvantages. Foreclosure by advertisement is relatively inexpensive but does not allow the association to pursue the co-owner for damages if there is insufficient equity in the condo unit to recover all monies from the foreclosure sale. A district court unit for damages is faster than circuit court action, but such a judgment is only as good as the collectibility of the delinquent co-owner, and such a judgment can be nullified by a bankruptcy. Judicial foreclosure provides the most flexibility and protection to the association, but requires a lawsuit in circuit court, is expensive and time consuming.
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. If substantial equity exists, the association must instruct its counsel whether to respond to an "overbid" (i.e., a third party bid higher than the association's bid). 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).
Assuming to overbids, a foreclosure sale will produce a Clerk's Foreclosure Deed, which must be recorded at the register of deeds office, reflecting Association's ownership of the foreclosed unit, subject to the first mortgage and subject to the owner's right of redemption, which normally is six months. During the redemption period, the Association and its counsel must frequently monitor for any foreclosure proceedings brought by the first mortgagee. Typically if financial circumstances cause a co-owner to be unable to pay assessments, the co-owner will ultimately default on his first mortgage, and the mortgagee will pursue foreclosure by advertisement. Often, there will be only a relatively short "window of time" within which the Association will have unit, ownership before the first mortgage sale, and the Association needs to take aggressive action to market the nit to recover its investment.
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.
Enacting a comprehensive administrative resolution on collection procedure and adhering to it ion a consistent basis is the best hope for a condominium association to minimize uncollected assessments.