Assessment Collection Primer

Introduction
The primary obligation of every community association is to maintain, repair and replace the common areas and administer the operation of the community.  In order to meet these responsibilities, an association must collect assessments to pay for the common expenses.  The levying and collection of assessments is a simple, straightforward process as long as the members make their payments in a regular and timely fashion.  However, difficulty arises when members fail or refuse to pay assessments.  In such instances, it is critical that an association have a delinquent assessment collection procedure in place and that it consistently follow the procedure.

 The purpose of this article is to outline the standard delinquent assessment collection procedure and to offer some tips on how to make the process more efficient and effective. 

Authority and Applicable Law
An association’s authority to levy and collect assessments and associated legal fees and costs can be found in the Florida Statutes and the association’s governing documents.  The assessment collection process for condominium associations is controlled by Chapter 718, of the Florida Statutes, commonly referred to as the Condominium Act, and the particular association’s governing documents.  Likewise, for cooperative associations, homeowners associations, and timeshares, the collection process is controlled by the governing
documents and Chapters 719, 720 (formerly 617) and 721, respectively.  Therefore, the first step in collecting any delinquent assessment is to comply with the requirements of your governing documents and the applicable controlling statute of your association. 

Uniform Collection Procedure
It is extremely important that an association establish a uniform collection procedure based on the controlling authority.  Thereafter, with few exceptions, all delinquencies should be treated the same.  Although each delinquent owner has his or her own reason for failing to pay a particular assessment, if an association regularly grants each owner special treatment, it will undoubtedly find that in the future a delinquent owner will use a selective enforcement defense against the association based on its special treatment of a prior delinquent owner.  Further, the wholesale granting of special exceptions inevitably becomes a slippery slope, which can ultimately lead to scores of owners paying assessments according to their own personal payment plan.  This results in an uneven cash flow for the association and a great deal of additional unnecessary administrative bookkeeping in order to track the individual accounts.  Therefore, as difficult as it sometimes may be, an association should work hard to avoid making special exceptions for individual owners regarding payment of delinquent assessments.

However, a general “no exceptions” policy, while recommended, does not mean the Board cannot on occasion make common sense business decisions regarding collections.  An example would be a delinquency created by the death of the unit owner.  Delaying the filing of a lien foreclosure lawsuit while the late owner’s estate is arranged may make more sense.  Likewise, if an owner with a good payment history but facing temporary financial hardship appeals to the Board before becoming delinquent and offers a reasonable payment plan, the owner can be accorded some relief by the Board without jeopardizing future collections.  However, such arrangements should be rare and only made after careful study by the Board.
Most associations collect assessments on a quarterly basis with the assessment due on the first day of each quarter.  Thereafter, if the assessment has not been paid within ten to fifteen days from the due date, associations generally will send a first notice to delinquent owners.  The first letter should be a “friendly reminder” letter that requests that the assessment be paid by a certain date, usually, no later than the end of the month.  Depending on the provisions of the controlling governing documents, the association may also be allowed to charge interest and a late payment fee.  If your governing documents provide for interest and late payments fees, these charges should be listed in the first letter.  Usually, the first friendly reminder letter will result in a significant number of delinquent owners making payment within the time allowed.

However, a certain percentage of owners who receive a friendly reminder letter will not make payment.  At this point, depending on the restrictions contained in your governing documents, an association may legally turn the matter over to the association’s attorney for collection.  However, most associations find that a second “warning letter” to the delinquent owners is effective.  It is recommended that the second letter clearly and concisely inform the delinquent owner that if the assessment and any interest and late fees are not paid within a short period of time (we recommend 10 days from the date of the letter) the matter will be referred to the association’s legal counsel for collection.  It is also recommended that the letter indicate that the owner will be obligated to pay the association’s attorney’s fees and costs incurred.

An association should wait no longer than 30 to 45 days beyond the initial due date of the assessment before referring the matter to the association’s legal counsel.  It is important to keep in mind that if an owner is not paying his or her assessments, it is not uncommon to find that he or she is also delinquent in other financial obligations such as making mortgage payments.  As such, if an association does not act swiftly, it may lose its bargaining power or in a worst-case scenario, lose its right to collect the assessment.  In our experience, if an owner is delinquent in a number of financial obligations, the swiftest creditor will often get paid while other creditors who delay do not get paid at all or get paid an amount substantially less than they are owed.  Further, while first mortgages are usually superior to the interest of the association, financial institutions holding first mortgages generally do not begin serious collection efforts until a mortgagor has fallen at least three months behind in the payment of the mortgage.  During this same period of time, if the association has acted quickly, it can collect an assessment that might otherwise be uncollectable if the Bank institutes a foreclosure lawsuit.
 

It is important to keep in mind that if an owner is not paying his or her assessments it is not uncommon to find that he or she is also delinquent in other financial obligations such as making mortgage payments.
 

The Lien
Once the collection matter has been referred to the association’s legal counsel, the attorney’s first step is to perform a deed search to obtain the exact legal description and name of the owner of the unit or lot.  Once this information has been obtained, a demand letter and Claim of Lien are prepared.  The Claim of Lien is recorded in the public records of the County in which the property is located and a copy of the Claim of Lien is sent to the delinquent owner along with a demand letter.  The letter advises the delinquent owner that the enclosed Claim of Lien will be foreclosed within thirty days from the date of the letter unless full payment, including all attorney’s fees and costs, is received.  Sometimes associations request that the legal counsel send a “pre-lien” demand letter giving the unit owner a third and sometimes a fourth chance to pay the assessment before an actual claim of lien is filed.  We generally advise against pre-lien letters because in our experience they do not result in a high percentage of owners making payments and therefore only delay payment to the association.  If the delinquent owner pays the assessment and all attorney’s fees and costs pursuant to the thirty-day letter, a Satisfaction of Lien is filed and the funds are paid to the association.  However, if after thirty days a owner has not paid all amounts due, the association’s legal counsel should request authorization from the association to proceed with the filing of a foreclosure lawsuit.

Foreclosure
The general rule in recording liens against real property is first in time, first in right, which means whomever records his lien first is superior to everyone else who records later.  This concept is critical in deciding on whether or not to foreclose a lien.  However, the Condominium Act grants condominium associations a type of “super lien” which is superior to all other liens except certain tax liens and first mortgages.  A condominium lien, regardless of when recorded, relates back to the later of the recording date of the original declaration of condominium or April 1, 1992.  The effect of this super lien priority is that condominium assessment liens can leap frog second mortgages, construction liens and judgment liens thereby giving the association greater payment priority.  Homeowner association liens are not accorded this same super lien status by Statute but rather their priority is controlled by the language contained in the governing documents of the association. 

In the foreclosure lawsuit, the association will request two forms of relief.  First and foremost, the association will request that the Court order the real property sold at a public auction if all amounts, including attorney’s fees and costs, are not paid by a certain date.  Secondly, the association will request that a money judgment be entered personally against the owner of the property for all amounts due and owing.  Once a foreclosure lawsuit has been filed, the association can expect that the lawsuit will be completed within four to six months depending on the defenses to foreclosure asserted by the homeowner.  Oftentimes, once the foreclosure lawsuit is filed, the homeowner agrees to pay all amounts due and the lawsuit can be quickly dismissed.

However, should the matter not be resolved through settlement, a judgment in favor of the association is usually obtained unless the homeowner has a legitimate legal defense.  Most defenses other than proving the assessment has been paid or is not owed fails.  Once the judgment is entered, a foreclosure sale is scheduled by the Court.  If the homeowner pays all amounts due prior to the sale date, the sale will be canceled.  At the foreclosure sale, the unit or Lot is sold to the highest bidder for cash.  The association is allowed to bid at the foreclosure sale and is given a credit in an amount equal to all assessments, costs, interest and fees owed.  If the association chooses to bid an amount beyond the amount listed in its judgment it must pay the difference in cash.  However, generally, although the association has the right to purchase the property at the foreclosure sale, it does not choose to do so because the goal is to recover all amounts due not the property.  If there is any equity in the property, there very likely will be third party competitive bidders at the foreclosure sale seeking to purchase the property.  If a third party bidder agrees to pay more for the property than the association is owed, he or she will become the new owner and the association will be paid in full.  It should be noted that very often there is a first mortgage on the property that will remain in place following the foreclosure sale along with any delinquent taxes owed.  However, should third party competitive bidders not appear at the sale, the association will, instead of receiving cash, take title to the property.  Thereafter, the association normally chooses to list the property with a real estate agent and sell it on the open market and thereby recover the money owed to it.  However, if the mortgage and any delinquent taxes are not paid the first mortgage holder or purchaser of the tax certificate will likely institute their own foreclosure lawsuit resulting in the property being sold once again on the Courthouse steps to the highest bidder.

In our experience, very few delinquent owners allow their property to be sold on theCourthouse steps. Generally, at some point in the assessment collection process, prior to the sale of the property, the owner will pay all amounts due and owing.  Sometimes, however, the association’s ability to collect past due assessments is effected by a foreclosure action instituted by the holder of the first mortgage or by the owner filing bankruptcy.  The association and the association’s legal counsel have no control over these occurrences.  However, if a mortgage foreclosure action or bankruptcy is filed, the association should not necessarily give up and assume that it will be unable to collect the delinquent assessments.  Depending on various factors, some of which are discussed below, affecting the mortgage and the timing of the association’s lien, the association may well be able to collect its assessments despite the mortgage foreclosure action or bankruptcy.  In both cases, however, if the association has moved quickly in its effort to collect the delinquent assessments the likelihood of recovering the delinquent assessments will be much greater. 

In the condominium context if a first mortgage holder files it own mortgage foreclosure lawsuit and the property is sold at public auction, depending on who buys the property the association may recover all, some or none of the past due assessments from the new owner.  If the first mortgage holder or its assignee purchases the property and the mortgage was recorded on or after April 1, 1992 or the Declaration of Condominium automatically incorporated statutory amendments then the mortgagee/purchaser is obligated to pay the lesser of the assessments, which accrued during the past 6 months or 1% of the original mortgage amount.  If, however, the mortgagee purchases the property and the mortgage was recorded before April 1, 1992 and the condominium Declaration does not incorporate statutory changes then the mortgagee is not obligated to pay any of the past due assessments.  If a third party bidder purchases the condominium unit at the sale then he or she is obligated to pay all past due assessments regardless of the recording date of the mortgage.  Although this has always been true the Legislature recently clarified the Condominium Act to make it crystal clear that third party purchasers are obligated for all past due assessments.  This can be quite a shock to the unwary bidder at a mortgage foreclosure sale of a condominium unit that owes assessments.

The HOA Act does not contain similar provisions obligating foreclosing first mortgage holders to pay past due assessments.  In such cases, the governing documents should be reviewed.
                                               

Although this has always been true, the Legislature recently clarified the Condominium Act to make it crystal clear that third party purchasers are obligated for all past due assessments.  This can be quite a shock to the unwary bidder at a mortgage foreclosure sale of a condominium unit that owes assessments.
                                               

Conclusion
Assessments are the lifeblood of every association.  Without a steady revenue source the association will be unable to function and perform its obligations to the unit owners.  Therefore, while not the most pleasant aspect of living in a community association, the Board of Directors is obligated to aggressively pursue the collection of delinquent assessments.  Further, by instituting and maintaining a firm and uniform collection policy, an association will send a clear message to the owners that nonpayment of assessments to that association is not an option.  Ultimately, an association will find that its delinquency rate will be dramatically reduced if it gains a reputation for zero balance of delinquent assessments.  ™

The information contained herein is not intended as legal advice which is applicable to specific situations and is based upon legal criteria which are subject to change.  Please contact Richard D. DeBoest II at (239) 333-2992 should you have any questions.

ÓRichard D. DeBoest II, Esquire (2001)