Dues, Assessments, and Foreclosures During the Pandemic and Beyond
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The COVID-19 pandemic has disrupted life on a global scale. Businesses slowed or stopped completely. Unemployment was at record numbers; and although businesses are reopening their physical locations and the rollout of COVID-19 vaccines may signify the beginning of the end of the pandemic, the economic impact may continue for quite some time. Consequently, many community, homeowner and condominium association (collectively, CA or association) boards are struggling with their obligations to collect dues and assessments from residents who are suffering economic hardship.
COVID-19 has made the job of CAs more difficult, as additional measures must be taken to ensure the safety of residents in common areas. Since many homeowners are working from their homes, essential services provided by the CA, such as security, trash collection, sidewalk and road repair, and general maintenance are even more important. In addition, CAs may need to spend additional funds on cleaning and sanitizing common areas. Unfortunately, at a time when dues and assessments are vital to maintain these services, many homeowners have lost their jobs or are working fewer hours, causing a decrease in their income which may make it more difficult to pay dues and assessments.
Although CAs should be compassionate in light of residents’ financial difficulties, they cannot waive the collection of dues and assessments. The CA is bound by its Covenants, Conditions and Restrictions (CCRs or governing documents) and the board of the CA owes a fiduciary duty to the association as a whole, not to individual owners. Many CCRs do not provide the CA with the ability to suspend the collection of dues and assessments. Even if the governing documents permit it, CAs oftentimes do not have sufficient surplus funds to suspend the collection of dues and assessments, which would likely disrupt the provision of services absent significant reserves. A balance must be struck that considers residents’ particular circumstances on a case by case basis but enables the board to fulfill its fiduciary duties to maintain the community pursuant to the CCRs.1 At the same time, the CA must follow their CCRs and must operate in a way that provides relative consistency so that similar situations are treated in a similar manner.
As the economic crisis continues, there are some temporary measures that the CA may consider implementing in order to fulfill its obligation to preserve the financial integrity of the association. In order to conserve the CA’s funds as much as possible, the CA’s CCRs should be consulted and, if permissible, the CA may consider reducing, postponing or suspending non-essential services, such as lawn care, non-urgent repairs, and/or new projects and/or construction.2 Because many owners may continue to struggle economically for some time, the CA may consider adding a bad debt line to its budget, or increasing it if one already exists, based upon the number of accounts in arrears. It is also a good time for CAs to work with an attorney to evaluate and, if needed, make adjustments to their governing documents, renegotiate vendor contracts or assist with obtaining a loan and/or line of credit.
It is important for CAs to continue communicating with all owners, emphasizing the continued importance of timely payment of dues and/or assessments. Many owners may not be experiencing financial hardship, and it is more important than ever that those owners timely pay. The CA may consider encouraging residents to notify the CA if they are having financial difficulties which impact their ability to timely pay assessments, and should be empathetic with residents regarding payments of assessments which those residents claim are late because of economic hardships related to the COVID-19 pandemic.
When an owner informs the CA that they are experiencing financial hardship because of the pandemic, CAs may consider, if their governing documents permit, providing additional time for the owner to pay assessments before turning over their accounts to collection, and may consider entering into reasonable payment plans with delinquent owners who are experiencing temporary financial hardship because of the pandemic. However, it is important for the CA to be cognizant of the applicable statute of limitations to take action to collect upon the account, if necessary, and to take necessary actions to protect the CA’s interests. Before deferring collections or entering into a payment plan, the CA’s governing documents and state law should be reviewed with an attorney to ensure that the CA’s interests are protected. As the board owes its fiduciary duty to the CA, it must ensure that its actions ultimately benefit the CA.
Any agreement to provide additional time to pay assessments should be in writing, either drafted or reviewed by an experienced attorney, and signed by the delinquent owner and the CA. Consider including an explanation of the financial hardship, the payment plan details, the number of months the CA has agreed to delay collections, whether late fees are included in the delinquent amount, and the rights of the CA to collect the delinquent amount if the resident breaches the agreement.3 The board may consider waiving late fees and penalties, but should only do that in negotiating the payment plan, not before, as many CCRs do not provide the board with the authority to waive late fees and penalties. The payment plan should not span a long period of time because in most cases that will not benefit the CA, and may require the other owners to make up the shortfall if many owners are in arrears. In some cases, a promissory note may be appropriate, but discussion of this with an attorney and the association’s accountant is crucial to avoid running afoul of the CCRs or corporate and/or tax laws for non-profit corporations.
At some point in time, moratoriums will be lifted and foreclosures will commence. CA boards should begin to plan for this eventuality now by reviewing their governing documents with an attorney to ensure that the foreclosure process is articulated clearly and understandably, and that it is in accordance with state law. All foreclosures should be commenced and processed in accordance with state law and the association’s governing documents.
Because of the coronavirus pandemic, the Center for Disease Control (CDC) issued a moratorium on evictions, which has been extended numerous times, and is currently is set to expire on June 30, 2021.4 Some states and localities have also issued eviction moratoriums,5 though many of them either do not apply to lien foreclosures or already have expired.6 Thus, even though most of the foreclosure moratoriums may not prevent an CA from foreclosing on a property, if and when a CA successfully forecloses, the eviction moratoriums may still limit the CAs ability to evict the resident. In that situation, foreclosure may not be in the best interests of the association as the CA will not be able to sell or rent the unit while it remains occupied by the former owner. Some CAs also may wish to delay such proceedings because of the hardship it would cause to owners during a global pandemic, but if foreclosures are postponed, it is important that the CA’s interests are protected by the timely filing of liens and other actions as required by the particular jurisdiction. It is important that the CA discuss these issues with an attorney with experience in community association law, to determine what is in the best interests of the CA, and to ensure that the CA’s interests are protected.
In some states, and depending on the specific contents of the applicable CCRs and other contracts, both judicial and non-judicial foreclosures may be permitted. In a judicial foreclosure, proceedings are commenced when the mortgagee or lienholder files a lawsuit against the delinquent homeowner. In a non-judicial foreclosure, a mortgage or lienholder does not need to go to court in order to foreclose on a property. Depending on the particular state law, the proceeding may be commenced with a notice of default, a notice of default with an accompanying notice of sale, or only a notice of sale. In other states, foreclosure proceedings may be commenced simply by publishing a notice in the newspaper and posting a notice on the property.7 The foreclosure typically proceeds more quickly as it does not involve the court, and may be less expensive.
Although non-judicial foreclosures may appeal to some CAs because they appear to be quicker and less costly, there is a downside to these types of foreclosures. Non-judicial foreclosures are not final, and can be challenged in court.8 Unlike a judicial foreclosure, where involvement of the court helps ensure that the rights of all parties - association, mortgage holders, and property owners - are considered, a non-judicial foreclosure typically does not. Thus, non-judicial foreclosures may be perceived as less credible and fair, and therefore are more likely to be challenged.
Non-judicial foreclosures may be particularly problematic in states that have statutes which confer superpriority status to CA liens. In those states, if the CA forecloses on its lien, it may extinguish first priority deeds of trust. In a non-judicial foreclosure in a superpriority state where a bank holds a mortgage on a property, the bank, in order to protect its interests, may challenge a foreclosure on procedural or other grounds. The resulting costs incurred and time spent in litigation may diminish or even eliminate the perceived advantages of a non-judicial foreclosure. Nonetheless, if a non-judicial foreclosure is undertaken by a CA, it is important to consult with an attorney experienced in non-judicial foreclosures to ensure that the foreclosure process complies with the particular state law requirements.
The economic impact of the coronavirus pandemic will be felt for some time. Meanwhile, CAs still need to fulfill their fiduciary duty of maintaining the integrity of the association’s finances. To the extent permitted by the CA’s governing documents, consideration should be given to collecting dues and/or assessments with compassion and flexibility for owners who are experiencing financial hardship because of the pandemic. Although current foreclosure and/or eviction moratoriums may render foreclosures impossible or impractical, CAs should plan for the day when these moratoriums will be lifted and foreclosures will commence. Care should be taken to follow the association’s CCRs and state laws when commencing foreclosures. Although non-judicial foreclosures may appear on their face to be quicker and less expensive, this may not be the case because they are not final and may not afford adequate due process protections to all interested parties, and therefore may be more likely to be challenged in court. Consultation with an attorney experienced in foreclosures should be undertaken when making the decision to foreclose and throughout the foreclosure process, particularly when a non-judicial process is used.
1 Some owners may request a reduction in the amount of dues and assessments because of the closure of certain amenities because of the pandemic. Although state laws vary, typically a reduction is only available when an owner does not enjoy the benefits of an amenity while other owners do. Owners should be reminded that amenity closures are for the health and safety of all owners, and that the CA may be incurring additional costs due to higher utility use and additional necessary cleaning. See Community Association Institute, Community Associations & COVID-19 – Delinquent Assessments Frequently Asked Questions, at https://www.caionline.org/Documents/DelinquentAssessmentsQ%26A.pdf.
2 How to Manage Collection of CA Assessments During Coronavirus Pandemic, https://emspm.com/assessments-during-coronavirus-hoa-collection/. It is important to note, however, that existing contracts cannot be modified and/or cancelled at the CA’s whim. Rather, the specific contract terms will dictate if and how that contract may be modified or cancelled. A CA should work with an attorney to review existing contracts to determine if a contract may be modified or cancelled.
3 Community Association Institute, Community Associations & COVID-19 – Delinquent Assessments Frequently Asked Questions, at https://www.caionline.org/Documents/DelinquentAssessmentsQ%26A.pdf.
4 https://www.cdc.gov/coronavirus/2019-ncov/more/pdf/CDC-Eviction-Moratorium-03292021.pdf The Federal Housing Finance Agency (FHFA) also announced an extension of its eviction moratorium for real estate owned properties, consistent with the CDC’s moratorium. https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Extends-COVID-19-Forbearance-Period-and-Foreclosure-and-REO-Eviction-Moratoriums.aspx. On May 5, 2021, the U.S. District Court for the District of Columbia vacated the CDC’s eviction moratorium. See Alabama Association of Realtors v. U.S. Dep’t of Health and Human Services, No. 20-cv—3377 (DLF), (D. D. C. May 5, 2021). The Department of Justice has indicated that they have filed a notice of appeal of the decision and intend toa seek an emergency stay of the decision pending appeal. https://www.justice.gov/opa/pr/justice-department-issues-statement-announcing-decision-appeal-alabama-association-realtors-v
8 Renault, Toward a More Equitable Balance: Homeowner and Purchaser Tensions in Non-Judicial Foreclosure States Elizabeth Renuart, Loyola Consumer Law Review, Volume 24, Issue 4, 2012, at https://lawecommons.luc.edu/cgi/viewcontent.cgi?article=1005&context=lclr
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