Archive for February, 2010

Dealing With Deadbeat Owners in a Shared Ownership Community–What Are Your Options?

Thursday, February 18th, 2010

I was recently forwarded the following question from a reporter, and I thought it was so timely and relevant that I would answer the question in my blog. It goes to the issue of deadbeat owners–how can you motivate them to pay, and what can you do when they don’t?

I read your article with interest as our HOA is in a similar position with an owner not paying his dues.  We are slightly in a different position as the owner in our building is renting the place out.  We were going to change our HOA rules to include an addendum along the lines of:

“When a unit owner is more than one calendar monthly behind on its monthly and/or any other outstanding fees such as insurance but not restricted to those items. The HOA will have a right to seek reimbursement of those funds through other means. Such as where rent is being received on the unit the HOA will have a right to contact both the management company and the renters directly to seek reimbursement of funds from rental income. In the event that such outstanding funds are not available the HOA will have a right to disconnect any services it is providing to the default unit owners such as but not restricted to water”. 

Have you heard of any HOA doing such a thing and in your experience do you think it would work?

I would be grateful for your advice

Regards, Perplexed

The short quick answer is that you may be able to collect rent, but you certainly cannot cut off their water. But why? How did I come to that conclusion?

I’m going to start at the very beginning (always a very good place to start). The rights granted to any shared ownership community, whether a condo, co-op or HOA, are granted to them either by state statute or the Covenants, Conditions and Restrictions (CC&Rs) on the property. This is a very important concept for people to understand–it doesn’t matter how creative you get, if you’re trying to do something that is not at least generally allowed by the powers granted by state law or your documents, it’s not going to fly. So then the first place for the reader above to look is the state statute, and, because he’s in an HOA, his CC&Rs.

In this state, Florida, the relevant statute, FS 720, happens to be pretty broad, saying that “The powers and duties of an association include those set forth in this chapter and, except as expressly limited or restricted in this chapter, those set forth in the governing documents.” When you read through 720, there is no provision that precludes associations from regulating renters, so the general concept would appear to be safe.

Now, let’s look for a moment at the specific proposed language in the covenant above. The real kicker, the teeth in the rule, is the right to suspend services from the unit. This issue is directly addressed by the HOA act, which says:

If the governing documents so provide, an association may suspend, for a reasonable period of time, the rights of a member or a member’s tenants, guests, or invitees, or both, to use common areas and facilities and may levy reasonable fines, not to exceed $100 per violation, against any member or any tenant, guest, or invitee.

Note very carefully what it allows–it allows associations to suspend the right to use common areas and facilities, and that’s it. You can’t turn off their water, or electric, or block access to the property, or remove their gate key (while the roads may be a common element, the statue specifically states that residents much have the right to enter and exit, and the right to park).

So the general concept of the rule proposed above, that of collecting rents from owners, would seem to be safe, but the right to turn off their water is not. But this is only the beginning of the investigation. After determining what rights are granted by the statute, a board considering such a rule must next look to their own laws, the governing documents. As mentioned above, in the case of an HOA this is usually called the Covenants, Conditions and Restrictions (CCRs). So to Perplexed, the question would be: do your documents allow the association to approve or regulate leases in any manner? Because if so, a clause governing collection of rent should probably be attached or amended to that section, and if not, the association has a lot more work to do.

Again, this is an issue that a lot of people don’t understand, especially those who tend to rail against the sweeping powers of community associations–they’re not so sweeping! Associations can only take actions that are allowed by state statute or their governing documents.

If the HOA has no power of any kind to regulate rentals, it’s going to be very difficult to pass a new rule governing them, as renting one’s unit is arguably a vested right that would require approval of 100% of the owners to pass. However, if the governing documents do give the association the right to regulate rentals, there are some options. One would be to require a standard form of lease to be signed by every new renter, and then to include a clause in that lease stating that the association may collect monies directly from the renter if the owner is deficient on his or her maintenance. Another option, if the documents allow, would be to do something more similar to that suggested by Perplexed–specifically write a rule into the documents that allows the association to collect rent directly from renters if the owner is in arrears. It’s really going to depend on the language of the documents, and this is where a good attorney can be worth the cost. Paying a few thousand dollars for a competent lawyer is a drop in the bucket compared to the many thousands you may lose over the years to deadbeat owners.

Now, as stated above, in an HOA in Florida you do have the right to suspend certain use rights, such as the right to use the pool, the clubhouse, or other facilities. And this can certainly give teeth to any regulation yoy write into your documents. But what Perplexed is really asking, and what we all ask ourselves, is whether you can make life so uncomfortable for a renter that they are constructively evicted from the unit, creating hardship for the owner and forcing them to pay their dues. And the answer to that, largely, is no.

So how in the world do you force an owner to pay maintenance? Why would they ever pay? The answer to that question is the same for condos as it is for HOAs, and it’s foreclosure. The Florida acts give associations the ultimate power over deadbeat owners–the power to own their homes. If an owner does not pay maintenance, you can put a lien on their property, and after 30 days you can foreclose on that lien and force sale of the property (in which case, the association can sometimes take possession for themselves, but this is a topic that’s too complex for a single blog). But what if the owner has a huge mortgage on the property? Won’t the association be subject to that mortgage?

No they won’t. The property is still subject to that mortgage, and the bank can come in and retake the property if they foreclose on their own lien, but the association has no contract with the bank and will never owe the bank any funds directly. So what’s the negative of foreclosing on a property? The main negatives include the cost of a foreclosure action (usually a few thousand dollars) and the fact that, once the association owns the property, any back-due maintenance ultimately owed by the foreclosing bank will be wiped out (as the association, the new owner, is now responsible for any unpaid maintenance, although they can always collect back maintenance from the original owner, if he or she is solvent). Despite this, the huge benefit is that you’ve just removed a home from a deadbeat, opening the door to an owner who may actually be able to pay their dues! In the meantime, the association may be able to rent out the home and make enough money to cover the assessments that weren’t being paid until the bank forecloses on their own lien (which could take years) or the association is able to find a new buyer for the home. Foreclosure is the gold standard for dealing with deadbeat owners, it’s a power available to every SOC, and it’s in every board’s best interest to establish a clear, strong collections policy that includes foreclosure when appropriate.

Now don’t despair yet, because there is a light on the horizon. A number of Florida legislators are proposing laws during the upcoming session that will both specifically allow associations to collect money from renters when owners are delinquent, and that will grant greater rights to suspend use of common elements, such as cable television. These laws would make the situation at Perplexed’s HOA much easier to manage, and if they’re important to you I recommend that you send a letter to your Florida legislator urging them to support such laws.

In any event, Perplexed, good luck, find a good lawyer, and let me know how it turns out! I’ll keep everyone posted through my blog. And please feel free to send me questions through the website–I’ll try to answer as many as possible. The forums are a great place to ask questions as well, and to get advice from SOC owners all over the nation! Let’s start those posts!

Update on this question:

Later today I spoke with the gentleman who asked this question, and he confirmed that his community is actually a condominium, not a planned development governed by a Homeowner’s Association (an HOA). This is an important distinction, and it brings up two points. First, condos, co-ops and HOAs are all different, and they are not interchangeable. They are often guided by totally different laws and statutes. Like the writer, many in the general public use the term HOA to cover any shared ownership community, but the only way you can know exactly what kind of association you have is by reading the documents.

Now, on to condominiums. The reason it’s important is because, unlike HOAs, condominiums are a construction of state statutes. They don’t exist without the law–in this case, Florida Statute 718. Because FS 718 lays out the rights and duties of condominiums, if a right is not granted under that statute, it doesn’t exist (the legal explanation of this is a bit more complex, but for laypeople it’s enough to understand that they only rights associations have flow from the statutes).

Unlike FS 720, FS 718 does not give condominiums the right to restrict access to the property in any manner, or to restrict use of the common elements. In fact, it specifically says that those rights can’t be restricted. So, under Florida law, condominiums cannot prevent owners from using the pool, or cut off their cable TV, or water, or turn off their gate keys–all of this is prohibited by law. While it is still allowable to collect money from renters (subject to that power existing in the documents), the only other power available is to foreclose. Now, that doesn’t mean that these restrictions aren’t tried in many communities, and some lawyers probably sanction them–but they’re almost certainly not legal. That’s why it’s so important, if you live in a condominium in Florida, to contact your legislators and urge them to support legislation to allow condominium associations to pass use restrictions for deadbeat owners.