By: Ronald J. Barba
Anyone who has served on the board of a condominium association knows that common charges are the life blood of their community. Having spent long hours gathering information from vendors and looking to the future needs of the community, boards and their property managers struggle to adopt budgets which balance the financial obligations of the Association against the fiscal demands on each unit owner.
Over the years, the needs of common interest communities have evolved and intensified as capital improvement projects once the subject of a long range reserve study, now loom ominously close to indispensable obligations. Unfortunately, the challenges of collecting common charges from defaulting unit owners evolved with each “tweaking” amendment to the Common Interest Ownership Act have grown exponentially as well. From its original version in 1984 to its current form, the CIOA has become significantly more complex and that complexity has extended to collections. This article is designed to point out some of the common errors made by Associations when trying to collect against defaulting owners. So let’s begin at the beginning.
Failing to Prepare is Preparing to Fail
Passing an enforceable budget is unquestionably the most important aspect of the collection process. Boards should be wary of the timing and notice requirements of their documents and the CIOA before adopting any budget. Every year a Board must adopt a proposed budget for the common interest community. The board must present the unit owners a summary of the proposed budget including a statement of any reserves and a statement of the basis on which the reserves are calculated and funded. Along with sending the summary and statements, the board must schedule a unit owner meeting at which the unit owners may ratify the proposed budget. The statute requires that the meeting be scheduled with at least ten days notice but no more than 60 days notice.
Depending upon your individual declarations, the unit owner will ratify the budget if less than a majority vote to reject it. In those instances where the budget is rejected, the board may rely upon the last approved budget to set common charges for the unit owners. All too often, boards will omit a step on the way to passing a budget only to find the lien unenforceable when challenged in costly litigation.
One of the few defenses available to a unit owner in a foreclosure action is to claim that the lien for common charges is invalid because the budget was not properly passed. A board must follow the formal requirements of CIOA in the adoption of the annual budget. Notice and disclosure provisions of the statute mandate formal compliance by Boards. Non-compliance opens each collection effort vulnerable to attack by savvy owners or their watchful attorneys.
Boards must determine how to handle defaulting owners as a standard part of its governance obligations. Some boards bypass this obligation all together and hope friendly nudging will work. Often this stand-off approach makes matter worse and results in owners getting so far behind they cannot recover. The Association loses significant sums which fall outside the priority or worse, outside the statute of limitations. I suggest a balanced firm position. Educating unit owners about their obligations and the consequences of failure is a good start. Providing written warning to those who fall slightly behind will re-enforce the obligation. When that fails, initiating formal collection efforts is appropriate.
Adopting a written collection policy is the best course of action for a Board. The collection policy is adopted after the Board considers many of the factors cited above and weighs those factors against the limited priority lien available to CIOA communities. CIOA mandates that before any collection of unpaid common charges is commenced the Board must either vote (at a duly noticed meeting) to refer the matter to the attorney for collection or it must adopt a written collection policy setting forth the contingencies leading to collection. A well-crafted collection policy which sets forth all of the factors triggering a collection action such as the timing, interest rates to be added, and the priority of payments made.*
The most important factor to be considered by Board is “time”. Since 2013, the priority lien enjoyed by common interest communities over first and second mortgagees was extended from six months to nine months. The extension of time was a trade off when banks lobbied successfully to require associations to provide sixty days advance notice before commencing a foreclosure action. As a result of these changes, boards must be more vigilant and organized to avoid losing common charges which fall outside the priority. CIOA prevents the association from commencing a collection action until the owner’s arrearage exceeds two months of common charges. Therefore, the minimum delay in commencing a foreclosure is now four months! For those who are math-impaired, it means that the Association has five months from the commencements of the lawsuit to obtain a judgment before unpaid common charges become uncollectible. Five months may sound like a long time, but courts move slowly and any wrinkle in the collection could postpone judgment weeks and sometimes months.
Join us next week for Part 2 of Challenges in Collections.
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*There is some controversy about the nature of collection policies. Some argue that such policies are rules and must therefore be subject to notice and comment by the owners before being implemented. The other more convincing approach is to treat collection policies as internal business operating policies of the board. A careful reading of the definitions section of CIOA and recent case law on the subject should resolve the dispute although a case is currently an appeal before the Connecticut Supreme court which could potentially address the issue.