COLLECTING DUES IN TOUGH ECONOMIC TIMES
Brandt, Fisher, Alward & Pezzetti, P.C.
by David H. Rowe
I. Introduction
As a result of our struggling economy, there is a dramatic increase in delinquencies and late payments of condominium association and Home Owner Association (HOA) dues. To insure the stability of any association and maintain property values, it is more important than ever, and absolutely crucial, for the Association's Board to diligently and effectively pursue collection of fees and dues. Additionally, the Association Board has a fiduciary obligation to pursue collection of these dues.
Associations' annual budgets are based on the assumption that all the co-owners promptly and consistently pay their assessments. Typically, delinquency rates for an association range between five (5%) and twenty-five (25%) percent and sometimes, even greater. These delinquencies result in budgetary shortfalls and ultimately could result in the need for a special assessment to all co-owners. Even worse, decreased property values result from under funded Associations. For these reasons (special assessments and decreased property values) failure to pay Association dues directly and substantially effects all co-owners' pocket books.
Boards that are slow, lax or even neglect to collect assessments quickly train the co-owners that non-payment is acceptable. The key to controlling and eliminating delinquency rates is for the Association to be prompt, consistent, and persistent in its collection practices. In the past, many Associations have relied solely on the recording of liens to collect delinquent dues. Although recording liens is necessary, unfortunately when a unit is foreclosed by a lender, generally, the lien of the Association for unpaid dues is eliminated. Furthermore, repayment of the lien can take years and judicial enforcement can be cost prohibitive. But in addition to recording liens, there are alternative courses of action that boards should pursue.
The intention of this article is to summarize some of the strategies that have been successfully utilized to collect delinquent Association dues in these tough economic times and to address common issues facing Associations.
II. Strategies to Collect and Practical Application
A. Recording a Notice of Lien
The Michigan Condominium Act and Association by-laws allow for the recording of liens. I recommend every Association record a lien on a co-owner's property when they become more than thirty (30) days delinquent. A lien not only provides notice to prospective purchasers and title companies of the unpaid dues, it may also provide the only protection an association has in bankruptcy, which I will discuss in greater detail below.
B. Foreclosure of a Condominium Lien
The Michigan Condominium Act ("Act") sets forth the rights of an Association to foreclose on its lien for unpaid Association dues. Generally, this is not a practical strategy for an association to pursue for several reasons, including:
1. The holder of a first mortgage, as well as state and federal tax liens are almost always superior to the Asociation's lien. This would require the Association to pay off any first mortgage and/or tax liens prior to foreclosure, which is impractical for most Associations.
2. The redemption period (The period during which a borrower may reclaim the title and possession of property by paying the debt it secured) is six months to one year. During this period, if the foreclosed owner pays the outstanding dues plus costs they may redeem the property.
3. It is unlikely the Association will be able to recoup all of their costs in such an action. The legal and advertising costs of foreclosure are generally high. Many judges are reluctant to award actual attorney's fees.
The Condominium Act does empower an Association to move for a receiver in a foreclosure action to manage a unit, which may be useful where rent is being collected by a co-owner. However, in practice, many judges are reluctant to appoint such a receiver.
C. Judicial Action to Collect Dues
Often times the most effective means to collect delinquent dues is filing a judicial action to obtain a money judgment.
Without waving an Association's rights related to the foreclosure of the lien, the Association may file suit to collect the delinquent dues.
Generally, the condominium by-laws allow the Association to assess all legal fees and costs associated with the suit to the delinquent co-owner. Therefore, the threat of litigation alone and associated expenses being assessed in addition to the delinquent dues, often times persuades a co-owner to bring their delinquent dues current.
If owners do not immediately pay, generally, they do not defend the suit and a default judgment against them is entered, which includes all attorney's fees and court costs. Once a judgment has been issued by a court, the Association can proceed with post-judgment collection activity, such as garnishing wages and bank accounts, as well as placing liens on other real estate owned by the co-owner.
D. Notice
Prior to recording a lien or filing a suit, an Association should review its by-laws to ensure it is properly following the appropriate process, especially related to notice. Generally, condominium by-laws require a "10-day notice" prior to the recording of a lien, proceeding with foreclosure or taking any legal action including filing a suit. The notice is required to be in the form of an affidavit setting forth certain relevant information. This affidavit is the actual notice of lien that should be recorded in the County's Register of Deeds ten (10) days after it is sent to the co-owner.
It is recommended that an Association send the appropriate notice to all co-owners that are more than thirty (30) days past due and record the lien ten (10) days after the notice has been sent.
E. Other Strategies
1. Accelerating Dues
Generally, condominium by-laws include the right of the Association to declare all unpaid installments of the annual assessment for the pertinent fiscal year immediately due and payable. This right is a useful tool to utilize with co-owners who are chronically delinquent prior to filing suit, thereby allowing the Association to seek a judgment for the entire accelerated balance.
2. Discontinue Services
The majority of condominium by-laws grant the Association the right to discontinue any services to a delinquent co-owner upon seven (7) days written notice of its intent to do so. These services may include prohibiting access to certain community areas and/or discontinuing certain utilities. Consult an attorney prior to cutting off any utility, as it may expose the Association to liability if not handled properly and with proper notice.
3. Right to Vote
A delinquent co-owner generally loses all rights to vote at any meeting of the Association so long as the delinquency continues.
4. Prohibition on Using Common Elements
Further, a delinquent co-owner may be barred from using any and all common elements until the delinquency is cured.
5. Collection of Rent
An Association often times has the right to collect rent directly from a tenant of a delinquent co-owner's unit by providing notice to the tenant and recording the notice.
III. Collection After Foreclosure
Even though the Association's lien is eliminated post foreclosure (meaning it no longer encumbers that real estate), the dues may still be collected from the individual co-owners. Properly drafted by-laws should include language that states that the owners remain personally liable for unpaid assessments even after their interest is foreclosed. Generally, it is necessary to file suit to collect the dues. Post-foreclosure judicial actions have been found to be a successful way to collect dues even after the Association's lien has been eliminated by a Bank's foreclosure.
Additionally, after the redemption period expires (usually 6 months after the foreclosure sale) the foreclosing bank most often becomes the owner of the property; the dues that become due from the expiration of the redemption period should be collected from the Bank. If the bank does not pay, those dues can become a lien on the property. A copy of the Sheriff's Deed should be obtained and notice should be sent to the Bank when the redemption period expires, setting forth the amount of the dues, where payment should be sent, and providing a copy of the by-laws. Banks generally deny liability; however, legally they are obligated to pay the outstanding dues that are incurred post redemption period.
The only responsibility the Bank could have for the delinquent dues prior to the expiration of the redemption period is if a special assessment is created for all co-owners to pay an equal share of the delinquent obligation of the foreclosed co-owner. The Bank can be assessed only their equal portion.
IV. Collecting Dues After Bankruptcy
All collection activities are prohibited during bankruptcy. That would include recording of a lien. The Association that has already filed a lien is a secured creditor in a bankruptcy and may file a claim with the Bankruptcy Court for collection of the dues. Additionally, if a lien was properly filed and the dues are discharged by the Bankruptcy Court, the lien remains on the property. The personal liability of the individual co-owners is discharged (meaning you can't pursue a money judgment against them), but if the property is sold or refinanced, the Association may be paid. The Association may also foreclose its lien (after obtaining a Lift of Stay), when the circumstances so dictate. Again, it is very important to record a lien in a timely manner to protect the Association in case of bankruptcy. Without the lien, the Association is treated as an unsecured creditor and most likely will recover nothing from the co-owner.
V. Fair Debt Collection Act Liability
In collecting association dues, all Associations should be advised of possible liability under the Fair Debt Collection Practices Act. Empty threats of litigation, foreclosure, or legal liability or over aggressive activity may violate the Act and subject the Association to substantial liability. Additionally, all correspondence to the debtors should have the appropriate disclosures and warnings.
VI. Conclusion
Even in this tough economy, with proper collection practices, Associations can greatly decrease their exposure to delinquent Association dues and exposure to writing off dues in case of foreclosure or bankruptcy. Associations' boards must closely abide by their fiduciary obligation to the co-owners by adopting an aggressive and consistent collection strategy.
For consultation and advice on creating and implementing your Association's collection strategies, please contact my office for an appointment.
The materials and information contained in this Article are offered for informational purposes only and is not legal advice. Do not act or rely upon any of the resources and information contained in this letter or enclosures without seeking professional legal advice. This Article alone does not create an attorney/client relationship.David H. Rowe is an attorney with the law firm of Brandt, Fisher, Alward & Pezzetti, P.C. and concentrates his practice in the areas of real estate, condominium and collections law. Mr. Rowe can be reached at (231)941-9660 and drowe@bfarlaw.com.
David H. Rowe; Brandt, Fisher, Alward & Pezzetti, P.C. 1241 E. Eighth Street, Traverse City, Michigan 49686; 231.941.9660; drowe@bfarlaw.com.
No Public use, reprint, dissemination or distribution of this article is permitted without Mr. Rowe's express prior written authorization
©BRANDT, FISHER, ALWARD & PEZZETTI, P.C.
This article is provided for informational purposes and should not be acted upon without professional advice.