The Subtle Art of Collecting Arrears
By Keith Loria
Published in New England Condominium, July 2012
During the tough economic environment of the past few years, many condo owners have faced job losses, pay decreases or just financial uncertainty. Unfortunately, this sometimes leads to owners not paying their common charges.
Unpaid, overdue debt that is not collected can wreak havoc on a condominium association. In small communities, it could quickly cause the association to have trouble meeting operating expenses. Even larger associations will eventually feel the effects of the shortfall if multiple units fall into arrears.
“No one wants to throw anyone out of their house, which is why there are steps to warn and help people,” says attorney Mark A. Sank of Mark Sank & Associates, LLC in Stamford, Connecticut. “They have to make payments because the board has a responsibility not to expose the association.”
It’s vital for boards and managers to take a proactive role in collecting common charge arrears to ensure that their condominium associations remain financially stable.
“The best way to protect yourself is to have a collection procedure in place,” says Jim Toscano, PCAM, president of Property Management of Andover, Inc. in Lawrence, Massachusetts. “You need to keep people educated. We have a very fast turnover [in Massachusetts] and if funds are not received in a timely manner, they go to collections after five weeks.”
Attorney Daniel S. Nagel, principal in Cohen and Wolfe’s Common Interest Communities Group in Bridgeport, Connecticut, says that everyone in the condo should understand the collection procedure from the time they first move in—and many times it’s written in the bylaws.
“Associations should have a written procedure that is disseminated to everyone so that people know exactly the way things are done, and more importantly, that things are done consistently to all unit owners,” he says. “People need to know the rules of the game.”
According to David J. Levy, PCAM, president of Sterling Services in Holliston, Massachusetts, each board has to vote in their collection policy, but in Massachusetts, the steps on collection have been the same since 1993, when the Super Lien (see sidebar) law went into effect.
“Typically, a $50 late fee is posted on the 16th of the month, as fees are due on the first and a two week grace period is more than fair,” Levy says. “Statements should be mailed out after the late fee by the 25th of the month.”
Sank has been representing condominiums for more than 30 years and has his management companies on a routine that seems to produce results.
“The common charges are always due on the first of the month and late by the 10th. When that comes and goes, I recommend that the management company send a late payment notice and notify them of the fine,” Sank says. “The next month, a statement will go out showing they owe two months, and when the 10th comes again, and it’s still not paid, they will send one more ‘last chance’ letter.”
Sometimes people will call and try to work something out, but if there’s still no response or attempt to pay, it’s turned over to the association’s lawyers.
Once Sank takes control, he sends out a 30-day demand letter and includes a small legal fee. The letter has a good response rate because now owners see that the association is really serious. At the end of that period, if no money is collected, he recommends commencing foreclosure.
“The reason we do it on such a tight basis in Connecticut is that there is a six-month super lien,” he says. “That’s why we start the action on the third month and we can get a judgment before the six months are exposed.”
Last year, Connecticut changed its law, so that associations are now required to wait at least two months before starting foreclosure proceedings — because too many attorneys were jumping the gun and filing after just one month of someone being late.
“If at any time, in response to the letter they contact us—maybe they had a medical emergency or lost their job—if they can set up a payment plan and pay something and be current going forward we will accept it,” Sank says. ”
In Massachusetts, under state law, after 60 days, as the third condo fee is being applied, the trust’s attorney contacts the homeowner in writing and a very modest legal fee is added to the money owed.
“Typically, this works 25 to 50 percent of the time,” Levy says. “If after 10 days, someone has still not paid, the bank is notified, which requires running the title, as mortgages are frequently bought and sold.”
Costs Begin to Climb
While the legal fees are a bit more, they are still manageable and this step normally has much better results.
“This works 90 percent of the time, as the bank simply pays the condo association and adds that amount to the borrowers’ balance,” Levy says. “If the homeowner and the bank do not pay from these two letters, then the collection case goes in a very different direction—court involvement is now needed.”
This is when the legal fees start to be significant. Expenses include a title search, preparation of a summons, a court filing fee, attorney fees and an appraisal. That can easily add up to $1,200 to $2,500. The end result if the bank does not intercede on behalf of the homeowner will be a foreclosure auction.
“Let’s assume the owner’s common charges are $200, and they get behind $600; the minute it goes to a lawyer and he gets involved with the letter, the fees are going to be more than $1,500 before you know it,” Nagel says. “Obviously, if you are so down and out and you don’t have the money, it doesn’t make that much a difference because you are probably not paying your mortgage either. But if that’s not the case, I think people will make some arrangement for payment before the attorney’s costs come into play.”
An association’s best method for striking fear to the delinquent payer to collect common charge arrears is filing a lien against the unit and foreclosing on it. Once filed, the lien will protect the condo by blocking the unit owner from selling or refinancing their unit without first paying off his or he arrears to the condo association.
When a condominium’s lien is filed, the condominium becomes a secured creditor under the Federal Bankruptcy Code so if the delinquent unit owner files for bankruptcy, the condominium will ultimately get a higher percentage of the debt paid as a secured creditor than if it didn’t file a lien.
Cause and Effect
Even the best-run condos will most likely face this issue eventually and it’s important that there is a plan in place to make up for the missing money.
“You may need other homeowners to pick up the slack or you are going to have to dip into the capital account and savings to make up for it,” Sank says. “If you have several homeowners that aren’t paying, it can really make a big impact.”
Other effects of non-payers are that the association may need to stop non-essential services like landscaping, painting or even shut down a pool if the arrears situation gets tight.
“You should never take the money from reserves; you can’t rob from the future to pay now,” Toscano says. “If worse came to worst, you delay service. You need to do your best to cut back on things that you might not be used to cutting back on.”
Legally, it’s common property but ethically, it’s private information, so revealing to others that someone is late with their payments is a judgment call on the part of the association.
“Every association is different. Some choose to publish the information and some keep it confidential for as long as they can,” Sank says. “They are all neighbors and they want to get along, so they don’t want to go and advertise difficulty and create a bad situation.”
Sank does say that for a repeat offender or someone who has fallen deep in arrears, the board needs to tell the other homeowners because it impacts the association as a whole.
After all, if a condo association is expecting a certain level of collection to fulfill its budget, and the money does not come in, things can get problematic in a hurry. The bottom line: an aggressive collection policy is important to keep disasters from happening.