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.
As a Community Association attorney, I’ve been on both sides of the fence as it relates to association litigation. Whether I am initiating litigation against others on behalf of the association or defending the association for claims brought by others, the following holds true: litigation is expensive, time-consuming and emotionally draining for those involved. The purpose of this Blog post is to educate community leaders on how to implement best practices in order to avoid litigation.
Association as a Plaintiff
Collections
Let’s face it: unit owner delinquencies are a problem for most associations. Sometimes avoiding litigation in collections is not possible due to chronically non-paying unit owners. But much of the time, litigation can be avoided if the association stays proactive in its efforts to collect overdue assessments.
To begin, every association should implement, and utilize, a practical collections policy that protects the interests of the association while, at the same time, seeks to resolve the arrears without the necessity of litigation. A multi-tiered policy is often the best way to try and collect the arrears while resorting to litigation as a last step. For example, after the account is deemed delinquent (as “delinquent” is defined in the collections policy), a warning/demand for payment letter is sent to the delinquent unit owner by the association, requesting payment within ten days. Should the owner not pay within the allotted time period, a final warning/demand letter is sent to the delinquent unit owner by the association, requesting payment within five days. Should the unit owner again fail to pay, the matter is to be turned over to the association attorney for collection. Depending on what the collections policy provides, the attorney can either send an attorney demand letter (in compliance with the Fair Debt Collection Practices Act) or immediately initiate suit against the delinquent unit owner in order to collect the delinquent account.
Utilizing this type of collections policy thus allows the association to have a “two (or perhaps three) strikes and you’re out” approach when it comes to collections in an attempt to avoid litigation until it becomes absolutely necessary.
Transition and Declarant Issues
The majority of lawsuits filed by an association against a declarant are filed after many months, or even years, of communication and negotiation between the parties. However, the earlier the parties can begin to communicate and attempt to resolve the disputed issues, the better.
For instance, associations often wait until the formal transition process begins to bring up any outstanding issues related to the common elements. While the declarant certainly needs to address valid issues at transition, there is no reason why the association has to wait until the actual transition to request that the declarant correct a deficiency with the common elements. Rather, the association should open the line of communication early in the process to put the declarant on notice of the issue. Sometimes, if it is logistically/economically feasible, a declarant may handle the issues as they occur in order to keep the relationship between the parties “positive” and to avoid having to handle everything all at once at transition (however, depending on the particular declarant, this may not be possible).
Also, with respect to the formal transition, rather than digging in, puffing out their chests and litigating every issue, the parties are encouraged to respectively discuss and negotiate their positions and enter into a “Transition Settlement Agreement” in order to finalize the remaining issues and send each party on its way.
The moral of the story is that while litigation between an association and a declarant is sometimes unavoidable, if the parties effectively communicate early on in the process, agreements may be reached and litigation may actually be avoided.
Contract Disputes
In the association world, most contractual disputes involve a contractor/vendor that the association believes didn’t live up to its end of the bargain. While breach by the other party is sometimes inevitable despite the terms of the contract, an association can seek to avoid litigation if it can craft/revise/amend the contract in such a manner that fosters the ability of the association and the contractor/vendor to resolve the issue and/or terminate the contract with an agreed-upon recourse (i.e., liquidated damages).
It is recommended that the association have its professional property manager review and assist in negotiating contracts on behalf of the association. Managers generally have many years of experience under their belts when it comes to contracts, and they are a tremendous resource for associations.
When it comes to larger (as far as cost), and more technically complicated, contracts, it is advisable to have the association attorney review the contract to ensure that the association is best protected. Many times, onerous and one-sided (and sometimes unenforceable) clauses are present in the contract and these provisions should be removed from the outset. Other times, there are issues pertaining to breach, notice and damages that the attorney must strengthen and/or bolster for the benefit of the association.
At the end of the day, an association can best seek to avoid litigation by being proactively involved in the drafting process prior to execution of the contract. Otherwise, it might be “too late” and litigation may become the only option available to the association.
Enforcement (injunctive relief)
Similar to collections matters, sometimes avoiding litigation in an enforcement matter is not possible due to perpetually non-compliant unit owners and/or due to the nature of the violation at issue. However, litigation can be avoided if the association stays proactive in its efforts to enforce its covenants.
To start, associations should enact reasonable rules and regulations in compliance with their governing documents and enforce same equally and uniformly against all unit owners. Care should be taken to ensure that the proper notice, hearing and appeal requirements are incorporated into the rules and regulations. Doing so not only ensures compliance with the law (i.e., procedural due process), it also provides a mechanism for the association to try and work with the unit owner(s) to voluntarily remedy the violation prior to engaging in litigation in order to force unit owner compliance.
Finally, associations should make every effort to communicate with the non-compliant unit owner(s) throughout the process in an attempt to resolve the violation. Only after every reasonable opportunity has been exhausted, should an association engage in litigation to seek injunctive relief to cure the violation (the author notes that when the alleged violation involves actual or potential damage to property and/or results/may result in physical harm or bodily injury to a person, the association should expedite seeking a remedy and obtain emergency injunctive relief if required).
Association as a Defendant
Personal Injury – Premises Liability
Associations must manage risk appropriately in order to avoid litigation in premises liability matters. Proactive risk management measures include, but are not limited to:
Asking the association general liability insurer to perform a risk management assessment in order to provide recommendations to the association on suggested risk minimization techniques;
Ensuring that various contractors fulfill their duties in a manner that minimizes risk (i.e., snow plow contractors, security guards, lifeguards, landscapers).
Making sure that the association is properly maintaining common elements to eliminate common risks (i.e., broken/uneven sidewalks, potholes, trees and tree limbs);
Having the property manager perform routine inspections of the property;
Enforcing rules and regulations as required in order to avoid risk caused by unit owner violations.
By being proactive about risk minimization, associations will reduce the number of claims that are brought, and in turn, the likelihood of litigation.
Director and Officer (D&O) Liability Actions – Breach of Fiduciary Duty
Litigation brought by unit owners for an alleged breach of fiduciary duty by the association board of directors is a growing phenomenon. In order to avoid these claims, the board should act in good faith, treat all unit owners equally and perform its duties reasonably and with sound business judgment.
While such allegations will invariably be brought by at least one unit owner in every association, the more documentation an association has to substantiate its actions, the better suited it will be when a claim is made. Accordingly, it is imperative that the association keeps minutes of all board decisions, correspondence to/from unit owners, copies of all contracts and accounting statements and audits, among other things.
Finally, the author notes that associations should obtain adequate director and officer liability insurance coverage in order to best protect the board and the association.
Enforcement Issues
Unit owners frequently bring claims against the association for “selective” or “unequal” enforcement, meaning that the association board is allegedly picking and choosing how it wishes to pursue enforcement of the association covenants and/or is selectively deciding which unit owners they will seek to enforce the covenants against (in other words, the association is allegedly using its enumerated powers to “punish” some owners, and let others “slide”).
Associations can avoid litigation for selective enforcement by always acting: (1) in good faith; (2) reasonably; and (3) with sound business judgment. By following the enforcement procedures set forth in the governing documents (including proper notice, hearing and appeal requirements) and enforcing the covenants equally and uniformly against all unit owners, the risk of such claims is reduced.
Finally, it is noted that claims brought for selective enforcement often concurrently involve fiduciary duty claims (discussed above) and/or fair housing/discrimination claims (discussed below).
Defamation
A suit for defamation can arise in an association when a unit owner (or even a board member) alleges that the association defamed (whether through slander or libel, or both) the owner by communicating about the owner in a manner that has harmed the owner. In the author’s home state of Pennsylvania, and in many other states, when bringing an action for defamation, an owner must prove:
The defamatory character of the communication;
Its “publication” by the association;
Its application to the owner;
The understanding of the recipient of its defamatory meaning;
The understanding of the recipient of it as intended to be applied to the owner;
The special harm resulting to the owner from its publication; and
At times, that abuse of a conditionally privileged occasion had occurred.
While many suits for defamation brought by unit owners are baseless in the law, the association still must defend the suit, which is time-consuming and potentially expensive. Associations should therefore seek to act reasonably and avoid making potentially defamatory communications about the owner. Some frequent issues that have brought about defamation complaints are as follows:
Publishing the name of a unit owner whose account is in arrears to all owners either in a newsletter or by posting on a community bulletin board (whether electronic or physical);
Publishing the name of a unit owner whose account is in arrears on an association website, allowing the “world” to view it; and
Publicly discussing a unit owner’s alleged covenant violation at an open board meeting prior to issuing a final determination on the issue.
Finally, if the association has any doubts on how to handle an issue that may lead to a potential defamation claim, it is encouraged that the association contact its counsel for an opinion on the issue.
Contract Disputes
Contractors and vendors with whom an association contracts often bring claims against the association for breach of contract. More often than not, the association believes that the vendor or contractor has not “performed” pursuant to the contract terms (and/or has overcharged) and has therefore breached the contract. The association then withholds payment, which causes the vendor or contractor to sue the association for breach.
The key to avoiding these suits is for the association to act reasonably in how it approaches a contract dispute, including how it handles the above-referenced situation. Rather than simply withholding payment for an alleged breach by the vendor or contractor, which will likely cause the situation to escalate into litigation, the association should seek to communicate with the vendor or contractor in an effort to amicably resolve the dispute. Frequently, these disputes can be negotiated and resolved in a manner that’s beneficial to both parties when compared with the cost, energy and time involved to litigate a breach of contract dispute.
Fair Housing Claims
Title VIII of the Civil Rights Act of 1968 (“Fair Housing Act” or “FHA”), 42 U.S.C. §§3601 – 3631, and its 1974 amendment, made it illegal to threaten, coerce, intimidate or interfere with anyone exercising a fair housing right or assisting others who exercise that right, or to advertise or make any statement that indicates a limitation or preference based on a protected class, which includes race, color, national origin, religion or sex (gender).The Fair Housing Amendments Act of 1988 (FHAA) added two more protected classes to the FHA: (1) familial status; and (2) individuals with disabilities. The FHA applies to community associations because the FHA prohibits discrimination, by the association, related to any services and/or facilities the association provides related to the residential housing in the association. 42 U.S.C. §3604(b).
The US Department of Housing and Urban Development (“HUD”) has interpreted the FHA to include two types of discrimination: Disparate Treatment and Disparate Impact (also known as “Discriminatory Effect”). Disparate Treatment involves discrimination due to different treatment, i.e., treating someone differently because of race, color, sex, religion, national origin, familial status or disability. Disparate Impact involves discrimination by different impact, i.e., when a neutral policy or procedure has a disproportionately negative impact on a protected class.
Fair housing claims have been increasing steadily against community associations across the country. The most common fair housing complaints in associations are as follows:
Failure to provide a “reasonable accommodation” for a disability – examples include requests for animals (service and emotional support/companion animals) and parking issues;
Failure to provide a “reasonable modification” for a disability;
Familial status violations.
In order to avoid fair housing claims and litigation, associations should be educated on the law, act reasonably when making determinations and, when handling an accommodation/modification request, review same and issue a fair and reasonable determination in a timely manner.
Finally, the author notes that fair housing issues are discussed in greater detail in the author’s Common Ground magazine article entitled “All’s Fair”, in the July/August 2014 issue.
Alternatives to Litigation (ADR)
Finally, sometimes the only way an association can actually avoid litigation is to agree to submit the dispute to alternative dispute resolution (ADR). This can be binding or non-binding in nature, based on the agreement of the parties. Popular forms of ADR include Mediation (generally heard by a sole Mediator and is more of a “summary” proceeding where the parties and the attorneys submit information to the Mediator (ahead of time and/or at the Mediation) without the need for evidence/actual testimony to be introduced/taken at the Mediation) or Arbitration (frequently heard by a panel of Arbitrators and can include testimony and evidence at the proceeding).
By Edward Hoffman, Jr., Esq., CCAL
An abbreviated version of this Blog post was published in Ed Hoffman’s article in the July/August 2015 issue of Common Ground magazine.
I am not going to beat around the bush here: it is generally a horrible idea to “publish” a list of delinquent owners for others to see, even if the [usually decades old] governing documents in the community provide that it is permissible. This is even true if a delinquency list is not posted electronically but is still published in paper form and posted on the clubhouse bulletin board to “shame” the delinquent owner (which was the original intent of provisions in governing documents which allowed for such actions) – because all it takes is for someone to take a photograph of the delinquency list on their smartphone and post it on social media – then it is literally disseminated for the entire world to see! Also, for example, what if the delinquency information was viewed and utilized by a potential employer to deny a position to a “deadbeat” applicant, and, what if the delinquency information being relied upon was incorrect? It’s like a snowball that rolls down a mountain and becomes an avalanche.
Moreover, if the Association (or management company) is found by a court to be a “debt collector” under the Fair Debt Collection Practices Act (FDCPA) (which can differ by federal circuit and would, to some degree, be fact specific for each suit or claim), posting a delinquency list could be viewed as “blacklisting” owners and could therefore be found to be discriminatory conduct. The legal repercussions could be severe (i.e., expensive) if a violation of the FDCPA were to be found. See15 U.S.C. §§ 1692-1692p. Section 805 of the FDCPA, “Communication in connection with debt collection”, provides as follows in Section (b), “Communication with third parties”:
Except as provided in section 804, without the prior consent of the consumer given directly to the debt collector, or the express permission of a court of competent jurisdiction, or as reasonably necessary to effectuate a post-judgment judicial remedy, a debt collector may not communicate, in connection with the collection of any debt, with any person other than the consumer, his attorney, a consumer reporting agency if otherwise permitted by law, the creditor, the attorney of the creditor, or the attorney of the debt collector.
All of this is becomes especially true if the wrong information is published and disseminated and that information is used to the detriment of the unit owner. This opens a whole new can of worms for liability for the Association (and potentially the management company).
Finally, even if an Association may not currently be considered a debt collector under the FDCPA in many jurisdictions, this should not be the deciding factor on this type of issue. Rather, the Association should examine the entirety of the issue and the risk associated with sharing a delinquent unit owner’s private account information with other unit owners before making a decision that will likely end up costing the Association more (in many ways, not just financially) than it would benefit the Association. The correct analysis is therefore: “we might be permitted to do this, but is it in the best interest of the Association?”. The answer is likely no.
My advice: do not “publish” a list of delinquent owners!
Edward Hoffman, Jr., Esq., CCAL
* The content for this Blog post is based upon the [abbreviated] prior written work of the author as originally published in the March/April 2020 issue of CAI’s Common Ground magazine and in CAI’s HOA Resources Blog.
More than ever before, community associations are coping with financial shortfalls. Two issues which associations frequently encounter are short sales and foreclosures. This Blog post will discuss the implications of short sales and foreclosures as each relates to the community association.
Short Sales
A short sale occurs when a home is sold for less than the amount of the outstanding mortgage on the home, with the explicit agreement of the bank. In other words, the purchase price of the home is “short” of the remaining balance due on the existing mortgage.
Short sales are being used by owners in an effort to avoid foreclosure and possibly preserve the owners’ credit rating. While the home that is being sold via a short sale is not bank owned, the bank must approve (and ultimately determine) the sale price of the home as they are agreeing to reduce the amount owed on the mortgage. Banks generally prefer short sales over foreclosures because a short sale is accomplished in a much shorter period of time than a foreclosure and because the cost of a short sale is far less than that of a foreclosure.
Because community associations can possess a statutory lien on a particular property for past due assessments (which are usually present if the unit gets to the point of short sale), the association will be asked to approve the short sale. As a general matter, when a short sale is proposed and the association is contacted about the outstanding account balance, the association is offered only a percentage of the total amount it is owed so that the short sale can be accomplished (sometimes, the association is offered the full amount owed, but this generally occurs only when the total amount owed is proportionately very small when compared to the short sale price, and even then, such an occurrence is a statistical rarity). At this stage, the association must decide if it will accept less than the entire amount owed on the account or if it will “hold out” for the entire balance (it is noted that the amount the association ultimately accepts can and should be negotiated as the first offer provided is usually a “low ball” offer).
In making this determination, the association should consider the fact that after the short sale, a new owner will be present in the unit and will begin to pay assessments; therefore, the financial “bleeding” the association is facing will ultimately come to an end. Should the association refuse to accept a compromised offer on the amount owed, the likely result is that the short sale will not be consummated and the unit will end up in foreclosure. In a [Pennsylvania] foreclosure situation, the association is statutorily entitled to receive unpaid assessments, fees and costs that come due during the six (6) months immediately preceding the date of judicial sale of a unit. All other amounts owed to the association are divested in the foreclosure. Thus, community associations may actually end up in a more favorable financial position if a unit is sold in a short sale rather than in foreclosure. Of course, because each situation is factually unique, outcomes will vary. Associations should therefore seek the advice of a qualified property manager and/or counsel when they are faced with a short sale in the community.
Foreclosures
In general terms, a mortgage loan provides that the mortgagee (lender, usually a bank) possesses a security interest (lien) in a home purchased by the mortgagor (borrower). The foreclosure process begins when the mortgagor defaults on the loan, and the mortgagee begins legal proceedings to repossess the property.
As it pertains to community associations, and as previously indicated, in a [Pennsylvania] foreclosure situation, the association is statutorily entitled to receive unpaid assessments, fees and costs that come due during the six (6) months immediately preceding the date of judicial sale of a unit. All other amounts owed to the association are divested in the foreclosure. Once an Association learns that the property has been listed for Sheriff’s Sale, the Association should contact the Sheriff’s office to advise of the (1) existence; (2) nature; and (3) amount of the Association’s statutory lien. This being said, the association should always seek out the advice of counsel in order to determine a legally permissible course of action as Fair Debt Collection Practices Act (FDCPA) issues may arise in this setting.
Associations should also be aware that if the foreclosure process is completed and the foreclosing bank takes title (or if the bank takes a deed in lieu of foreclosure), the association should verify if a Sheriff’s deed has been issued to the bank and, if so, contact the bank and request payment of the prior assessments and other charges the association is entitled to receive. The association should also ensure that the bank, as [new] titleholder of record, will be promptly paying assessments going forward, as required by the community’s controlling documents. As a general matter, associations should stay on top of their collections efforts and apply them uniformly to all owners, including banks.
Associations should also be aware that federal law and federal programs have provided borrowers with additional options to be utilized in response to foreclosure proceedings and/or in an attempt to avoid foreclosure altogether. As a result of all of this, the foreclosure process is taking longer than ever before to get from start to finish, and Associations are waiting longer than ever before to see some sort of finality with respect same.
For example, the Home Affordable Modification Program (HAMP) provides borrowers with the possibility of lowering their monthly mortgage payments to make their homes more affordable. The population of homeowners that may be eligible for HAMP was expanded to include:
• Homeowners who are applying for a modification on a home that is not their primary residence, but the property is currently rented or the homeowner intends to rent it.
• Homeowners who previously did not qualify for HAMP because their debt-to-income ratio was 31% or lower.
• Homeowners who previously received a HAMP trial period plan, but defaulted in their trial payments.
• Homeowners who previously received a HAMP permanent modification, but defaulted in their payments, therefore losing good standing.
Moreover, other federal agencies, such as the Consumer Financial Protection Bureau (CFPB) and the Department of Treasury’s Office of the Comptroller of the Currency (OCC), are involved in the residential mortgage market from a regulatory perspective and can get involved on behalf of a homeowner whose home is in foreclosure. Accordingly, associations should be educated in and made aware of the various programs that exist and how each may impact the financial position of the association.
Finally, “other” issues occur during the foreclosure process that associations must handle in the best interest of the association. For example, when a unit is in the foreclosure process and the owner abandons the unit (and the foreclosing bank has not yet taken title), the association must examine its controlling documents and/or other legal requirements to determine what duty the association has to ensure that the unit is kept in good repair. It is noted that a foreclosing bank will often take similar action when a unit is abandoned by its borrower in an effort to protect its investment; however, the bank’s concern about preserving its collateral is different than the association’s potential responsibility in this regard because the association must examine its duty to keep the unit in good repair as it relates to the potential impact of the abandoned unit on all of the association’s owners/members and their units, not just the abandoned unit itself.
Because of all of the complicated financial and legal issues involved with short sales and foreclosures, and because each situation may be factually different than the those which have preceded it, associations dealing with these situations should seek the advice of both a qualified property manager and counsel to determine the best course of action for each specific situation.
Edward Hoffman, Jr., Esq.
* The content for this Blog post is based upon the prior written work of the author as originally published in the July/August 2012 issue of the CAI PA-DelVal’s Chapter’s Community Assets magazine.
