STORM WARNINGS

FOCUS ON COLLECTIONS WILL HELP PREVENT A DELINQUENCY FLOOD

If condominium board members are compiling a list of New Years’ resolutions, a commitment to staying on top of association collections should definitely be on it.

This is always important, but it is likely to be especially important this year for three reasons:

• Inflation is increasing the cost of major projects, which in turn will increase the size of the assessments on owners and the association loans required to pay for the projects.

• Inflation is also forcing some associations to increase common area fees, adding to the financial strain on owners who are already struggling with rising costs.

• Slower growth and economic uncertainty could boost unemployment, creating another risk for households and for condo associations.

Connect these three trend lines in condo associations and you end up with a fourth: Increasing delinquencies.

I’m already seeing evidence of this in the number of collection cases the firm is handling for clients.

Rising delinquencies are like a slow leak; ignore them and they will turn into a flood. Here are the essential rules we recommend for managing the collections process.

1. Protect the Super Lien. This statutory provision ensures the association’s ability to collect up to six months of delinquent common area fees plus the legal and other expenses related to collection efforts. Crucially, it also puts the association ahead of the mortgage lender should the owner default on the mortgage. Timing is critical. This is a finite six-month window. Initiate the collection process in the ninth month and the association may have to write off the first three months of delinquent payments. The rule of thumb that we advise: Associations should initiate the collection process no more than 60 days after an owner becomes delinquent.

2. Involve the association’s attorney early in the process. Your attorney should initiate the legally required notices, after the association has sent late notices to the owner.

3. Create a written collections process and circulate it periodically to owners. The policy should explain:

   • When payments are deemed delinquent

   • The charges applied to late payments

   • 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

4. Post applicable charges to owners’ accounts as they are incurred. Apply any payments delinquent owners make to their oldest balances first, unless the owner has otherwise directed the association. Balances older than six months won’t be covered by the priority lien.

5. Offer repayment plans to owners, where appropriate, but structure them carefully.

   • Plans should be offered on the same terms to all owners.

   • Repayment periods should be reasonable – usually no longer than one year.

   • Owners should be required to remain current on common area fees during the repayment period.

6. Watch your language. When it comes to collections, ‘a rose by any other name’ isn’t necessarily collectible. If you levy an assessment on owners to finance a capital repair, don’t call it a ‘special assessment.’ In fact, don’t use the words ‘special’ or ‘assessment.’ Special assessments won’t be covered by the super lien; supplemental condo fees – the term you should use – will be.

Please contact Richard Brooks or any of our MEEB Attorneys with any questions about lien enforcement and how to protect your association’s finances.