In an earlier blog I reviewed some of the options available to shared ownership communities (SOCs–condos, cooperatives and HOAs) when owners aren’t paying their maintenance dues. In that article I dealt mostly with Florida law, because the question came to me from a Florida homeowner, although the concepts are universally applicable. This time, however, I want to look at the Uniform Code (the Common Interest Ownership Act), which is law in about 25 states, and also touch on a couple of other options that are available to SOC boards.
First, here’s some information on uniform laws. Uniform laws are model statutes written, generally, by the National Conference of Commissioners on Uniform State Laws, in an attempt to standardize laws across the United States. The idea is that it makes laws more stable and understandable to more people, and it also ensures that court decisions between jurisdictions have some relevance to other states.
You can skip to the next paragraph if you’re not interested in the nitty-gritty of the legal issue, but this might interest some: there are two main court systems in the US–the federal system, which governs laws created by the federal government, and the 50+ state systems, which govern laws created by the states. This, by the way, is a huge oversimplification, but civil procedure is a year-long class in law school, so we have to make do. Only certain activities are governed by the federal government, usually those that are specifically laid out in the Constitution, and most often those issues which affect “interstate commerce”. Everything else is reserved to the states. Most crimes, for example, are state law issues–only certain larger crimes which cross state lines become federal issues for a federal court (ie, when a kidnapper drives from Kansas to Missouri). When a court makes a decision interpreting a law (and that’s what courts do–interpret laws written by elected representatives) that decision becomes precedent which is used by future courts in making their own rulings. But courts give a lot more weight to decisions within their own system–a court in Florida will consider a decision from a court in California, but it won’t be totally determinative, particularly because their laws are often so different. So the idea of Uniform Laws, overall, is to ensure that laws between the states are very similar, so that court decisions are far more consistent and precedents in other jurisdictions can be used by various courts.
In any event, in this case the laws we’re discussing are the Uniform Common Interest Ownership Act (UCOIA), an attempt to standardize laws for condos, co-ops and HOAs among the states. New Neighborhoods co-author Gary Poliakoff is one of the writers of this law. We deal with the uniform code quite a bit in the book, and it pulls ideas from laws in various states around the country to attempt to produce a uniform, go-to legal system for SOCs.
So what does UCIOA say about dealing with deadbeat owners?
Section 3-116 of the Act states that the association has a statutory lien on a unit for any assessment levied against the unit OR fines imposed against the unit owner. This is a significant change from many state laws which do not include fines among lienable offenses. Now, some of you may be worried that a board could simply levy unreasonable or unfair fines against any owner they don’t like, putting a lien on their unit when they don’t pay, but most state laws prevent this type of action, requiring fines to be approved by a committee of owners that are totally unrelated to the board. And also realize that if an association cannot file a lien over a fine, fines then have very limited value. Why would anyone pay a $100 fine if the association can’t effectuate the fine? Is the association going to sue the owner in small-claims court? (The answer–yes, your association certainly should, for exactly this reason, and that’s discussed a bit below). In any event, UCIOA allows liens for unpaid assessments and unpaid fines.
Under UCIOA, liens are automatic. The association doesn’t have to pay an attorney to file a lien–the fact that the declaration of the association is publicly recorded constitutes notice and perfection of the lien. If you don’t pay your bills, there is automatically a lien on your property. A boon to associations, making the job of collections dramatically easier, which is critical for the health of SOCs. The lien is superior to every other lien except primary mortgages, tax liens or liens recorded before the documents were recorded (which would be extremely rare in non-converted communities). The association must enforce the lien within 3 years, or it goes away.
Next the Act talks about enforcement of liens. It essentially says that liens are to be foreclosed upon just like any other real estate lien, subject to the laws of the particular state. Interestingly, it also allows that, in co-ops, if an owner doesn’t pay their assessment that owner may be evicted. The statute also specifies that the debtor is liable for any deficiency in the ultimate foreclosure sale (ie, if the debtor owes $100,000, and the property sells for $50,000, the owner still owes the association 50 grand).
So the intent of the UCOIA committee was to take the experience of some of the top SOC practitioners in the country and provide tools to solve collection issues faced by today’s communities. These tools are extremely strong–instant liens, liability for all deficiencies and even eviction in certain cases. This acknowledges the reality that shared ownership communities are based on the concept of shared expenses, and any owners that don’t share those expenses are not only letting down their neighbors but putting the entire neighborhood at risk.
Also important to understand is the concept that, even if the association forecloses on a unit and sells the property, the owner is still liable for any assessments that remain. How does the association collect? Through a lawsuit. This is where collections can get extremely expensive, and where boards need to make decisions that balance collections with financial realities, as well as the deterrence value provided by such lawsuits. Note that this principle holds even when a bank forecloses on a property. Many states have a safe-harbor provision stating that a bank is only liable for a tiny percentage of unpaid maintenance. However, even if the bank forecloses on a property because that owner hasn’t been paying their mortgage, the debt to the association is still valid! Any maintenance left unpaid by the owner may be collected by the association, through a traditional lawsuit.
Now, here’s the catch. Lawsuits are extremely expensive. Most assume they’re expensive because lawyers are crooks, but that’s not really accurate, as anyone who has tried to file a lawsuit on their own can attest. To file a lawsuit, you have to write a complaint against the defendant. A complaint is a document that lays out, in detail, why you believe you are owed money, and the exact specifics of the harm caused to you. Complaints are usually 5-10 page documents, and then they need to be filed at the courthouse in person. How long does it take you to write a 5-10 page document? I’m a professional writer, and writing a complaint takes me a minimum of a few hours, because the facts need to be exact. So let’s assume an average of 10 hours to write a complaint against an owner for non-payment of dues. Let’s also assume an average attorney charges $150 per hour (think that’s robbery? Do you have $100,000 of debt from law school? Lawyers charge a lot for the same reason doctors do, and in fact for the same reason IT professionals do–their training is costly and difficult).
So just filing a basic complaint against an owner is going to cost the association around $1500, at a minimum. That’s just to get the complaint written, filed and served. But to do anything else with that complaint requires many, many hours of the lawyer’s time, going to court, filing “memoranda of law” (memos) that argue the case and the law to the judge, and eventually fighting the complaint at a trial. This basic procedure has been around for centuries. You can expect any lawsuit to collect maintenance to cost the association $25,000 at a minimum.
So how can the association possibly file such an action in any but the most egregious cases of delinquency? Some don’t bother, and that’s certainly a valid decision. But consider the very important deterrence value of a lawsuit. If an association never files a lawsuit against an owner to collect dues, why would any delinquent bother to pay? Out of their respect for goodness and humanity? We already know they don’t care about their neighbors, so that certainly won’t work. Consider that, in a very large association, delinquencies can total hundreds of thousands of dollars. If a single $25,000 lawsuit, even over a small amount of money, can convince other owners to avoid the fight and pay their dues, that lawsuit has paid for itself tenfold. So the decision to file a collection lawsuit is not only guided by the amount of money owed, but by the deterrence value of suing the owner. Of course, in a small community with few delinquencies, filing a lawsuit probably won’t make sense. But for big properties, the board needs to consider the big picture.
Realize also that the association may be able to file a lawsuit in small claims court if the amount due is small enough, and that is almost always worthwhile. Small claims courts are the only courts in most states where a corporation may represent itself (without a lawyer), and the costs, other than time, are minimal. Small claims lawsuits to collect maintenance are a great option for smaller properties or when only a small amount is owed. Small claims lawsuits are also a great solution to collect fines, which are nearly always limited to small amounts by statute.
Whew! That’s a lot of information in one blog, I hope you found it useful. As always, please send any questions or blog ideas to email@example.com.