July 5, 2023

The Merriam-Webster Dictionary defines “lifeblood” as “a vital or life-giving force or component” (https://www.merriam-webster.com/dictionary/lifeblood).  In a community association, assessments are quite literally the lifeblood of the association as they are the vital component related to the association’s ability to operate and maintain the common areas.  When owners fail to make timely assessment payments, the deficiency impacts the community as a whole as the community is receiving less money than budgeted for operations, common area maintenance, and reserve funding.    The greater the percentage of owners that don’t pay, the greater the impact will be on the association to properly function.

Just how large a problem can assessment delinquencies become in a community association?    To put it in perspective, according to CAI’s 2021 National Statistical Review (which is the most recent available), there are 358,000 community associations in United States that collected approximately $106.4 billion in assessments from homeowners.    $106.4 billion!    While delinquency rates for communities vary widely depending on the type of community, geographic location and a myriad of other specific factors, it is not out of the question for a community to have a delinquency rate between five and ten percent in a well-run community and between ten and twenty percent (or higher) in a community where the collection of delinquent assessments is left unchecked.   These delinquency rates would lead to associations collectively receiving a total of $5.32 billion to $21.28 billion less per year in assessments from homeowners – which can lead to large financial problems for many community associations and the owners that live in the communities.

What do owners who live in community associations feel their communities should be doing to properly handle assessment delinquencies?   According to CAI’s [April] 2022 Homeowner Satisfaction Survey (which is the most recent available), fifty-nine percent of owners believe that the community should insist that every owner pay assessments, and involve attorneys only if the delinquent accounts are not brought up to date after sufficient notification.   Only fifteen percent of owners believe that the loss caused by delinquencies should be made up by increasing assessments for paying owners and ten percent believe that the association should curtail services and amenities and delay improvements and maintenance.   

Accordingly, a majority of owners believe that all owners should pay assessments, and should they fail to do so, the delinquent owners should be put into collection after sufficient notification of the deficiency is provided and no payment is made.  This is undoubtedly because owners who are delinquent in their assessments typically continue to benefit from the services provided by the association to the detriment of owners who actually are paying their assessments.  

Since association boards have a fiduciary duty/responsibility to ensure that assessments are levied and collected, the best thing a community association can do to avoid serious financial issues related to assessment delinquencies is to be (and stay!) proactive as it relates to the collection of delinquent assessments.  The first step in being proactive is for the association to adopt a formal collection policy for the collection of delinquent assessments in accord with the association’s governing documents.  CAI’s Best Practices, Report # 4, Financial Operations, provides that an effective collection policy should:

1.        Be established by a formal resolution of the board that:

a.    Specifies the problem to be solved (e.g., collection of delinquent fees);

b.    Delineates the procedures to be followed;

c. Designates the circumstances under which the procedures are required or permitted.

2.        Specify only actions that are within the power of the community association and its board.

3.        Set a firm due date for assessments.

4.         Outline the steps to be taken by the person(s) responsible for collecting assessments when a payment is late with a specific timeline for each step of the process.

  5.       Allow for discretion in special cases (the burden of requesting special consideration should be placed upon the owner). The discretionary power should be under the control of the board of directors.

  6.       Specify when a delinquent assessment should be referred to legal counsel (this step should be automatic once a delinquent assessment reaches a specific age or amount). 

7.        Provide for the collection of any costs associated with collecting delinquent assessments.

Once a collection policy is adopted, it must be distributed to every owner in the community.   Following distribution, the collection policy must be uniformly enforced as to and against every owner in the community.  Consistency is key to effective enforcement, so the board must ensure that the collection policy is utilized and followed as it pertains to every delinquent owner in the community.    

Being proactive in assessment collections also means pursuing any and all available legal remedies that are available to the community association (which vary by jurisdiction) including, but not limited to:

• Seeking a personal judgment against the owner(s) of the property in accord with the pertinent statute of limitations which exists in the jurisdiction for such a claim;
• Executing on a personal judgment by way of levy upon and sale of personal property, vehicle sale, bank account garnishment (or wage garnishment in some jurisdictions) and garnishment of rental income (if an owner’s unit is leased to a tenant);
• Filing a lien against the property (if applicable in jurisdiction);
• Foreclosure (judicial sale) of the property on a judgment lien;
• Foreclosure (judicial sale) of the property on a statutory lien.

Since there are times when delinquent owners purposefully ignore delinquency notices, demand letters and even lawsuits, but care about the use of recreational facilities or association amenities (this is especially true in resort communities), associations should also examine their governing documents and review their common interest community statutes to determine what amenities or other privileges may be properly withheld from a delinquent owner.  In Pennsylvania, the common interest community statutes were amended in 2018 to provide that, subject to the provisions of the community declaration (covenants), an association has the power to impose charges for late payment of assessments and, after notice and an opportunity to be heard, “[f]or any period during which assessments are delinquent or violations of the declaration, bylaws and rules and regulations remain uncured, suspend unit owners’ rights, including, without limitation, the right to vote, the right to serve on the board or committees and the right of access to common elements, recreational facilities or amenities.”   

Associations must also proactively and properly handle issues such as bankruptcy, bank foreclosures, tax sales and short sales of units in order to preserve any claims the association may have in the event any of any of these occurrences.   It is recommended that the association utilize counsel as these issues can be complex and there are timelines associated with the claims the association can bring.   

With bankruptcy in particular, the automatic stay “freezes” all collections efforts the association is engaged in and the association must adjust its practices pertaining to notices of delinquency and other issues related to the pre-petition assessments.  The association also may have to file a Proof of Claim in a Chapter 7 or Chapter 13 bankruptcy proceeding that has been filed by an owner and, in appropriate circumstances, may wish to seek relief from the automatic stay to pursue the real estate pursuant to the association’s statutory lien on the unit even though it cannot pursue the owner (debtor) on his or her personal obligation to pay the assessments because of the protection afforded to the owner from the bankruptcy filing.  Associations should know the difference between a “discharge” of the bankruptcy (which discharges the debt of the delinquent owner related to assessments that were owed prior to the bankruptcy filing) and a “dismissal” of the bankruptcy for some reason (which does not discharge the debt of the delinquent owner related to assessments that were owed prior to the bankruptcy filing).  Also important is to understand the distinction between a Chapter 7 liquidation proceeding where the owner is typically surrendering the unit in the association to the bank and all debt gets discharged (liquidated) and a Chapter 13 reorganization proceeding where the owner typically attempts to keep the unit (if the owner resides in the unit) and make payments to the creditors, including the association, in accord with a “reorganization” Plan approved by the bankruptcy court.    Finally, depending on the jurisdiction (determined by federal Circuit), the bankruptcy courts handle issues pertaining to the owner’s responsibility to pay, and/or the association’s ability to collect, post-petition assessments owed by an owner (i.e., assessments that come due and owing afterthe bankruptcy petition is filed) differently.   

Associations must proactively handle bank foreclosures of units so as to attempt to maximize recovery.   In a bank foreclosure setting, the association will typically end up with a statutorily prescribed maximum pursuant to any super priority lien which exists in the association’s jurisdiction (for instance, six months of assessments, charges and fees in the author’s state of Pennsylvania).   The association lien must be listed on the sale affidavit or other document so the association gets paid from the proceeds of the sale rather than having to chase the bank (or other purchaser) down for the assessments that the association is entitled to receive.  It is also noted that after a foreclosure occurs, the bank (or other purchaser) must pay the current assessments owed on the unit until the bank or other purchaser’s ownership interest in the unit ceases.   

Tax sales of units can vary tremendously by jurisdiction, but in many jurisdictions there are different levels of tax sale (which keep progressing should a unit remain unsold) and associations must understand how each type of tax sale works in order to properly attempt to collect delinquent assessments that are owed.  For instance, in Pennsylvania, there is an upset sale, a judicial sale and a repository sale.   At each level of tax sale, the liens and encumbrances (including association liens) vary.    At upset sale, the property is sold to the buyer subject to all liens and encumbrances at the time of sale.   This means that the association can assert a judgment and/or statutory lien be paid by the buyer if a property is sold at upset sale – obviously a good outcome for the association.   The association should always ensure that its lien(s) are listed with the tax claim bureau or other entity selling the property so the association can be paid some or all of its lien amounts if sufficient excess proceeds exist following the sale.  If a property is not sold at upset sale and moves to judicial sale or repository sale, it is sold free and clear of all liens and encumbrances, including any that are held by the association – which means the association will typically receive nothing (unless the jurisdiction allows for the association to be paid based on excess proceeds that exist in accord with a prior claim made by the association pursuant to a statutory lien).

It is also recommended that associations implement a general policy for handling short sales of units in the association.   A short sale is a private sale of a unit where the unit owner sells the unit for less than the mortgage (or other secured lien) amount that is owed on the unit.   To accomplish a short sale, all lien holders, including the association, typically agree to accept less than the amount owed on the unit.   In many situations, if a short sale falls through, the unit owner cannot afford to pay the mortgage on the unit and the property will end up in bank foreclosure where the association will end up with the statutorily-prescribed maximum pursuant to any super-priority lien which exists in the association’s jurisdiction.  Foreclosure proceedings can take a long time to get to disposition (sometimes years) and during this time, the association is typically not receiving any assessment payments from the delinquent owner.  It is therefore generally a better outcome for an association if a short sale occurs instead of a foreclosure, even if the association compromises its claim in some manner, because the association may be able to negotiate to receive an amount in excess of the amount it would receive in foreclosure and because the short sale will occur faster, placing a new owner in the unit that will begin to pay assessments.

Bringing this all together, it is important to remember that assessments are the lifeblood of the association and delinquencies drain the lifeblood away from the association.   To ensure the overall health and survival of the association, every association leader and board member must act to fulfill his or her duty to collect delinquent assessments.  Through proactive measures, associations can stay on top of delinquencies and collect the lifeblood for the benefit of all owners in the community.

Edward Hoffman, Jr., Esq., CCAL

* The content for this Blog post is based in part upon the prior written work of the author as originally published in the September/October 2019 issue of CAI’s Common Ground magazine.