The ongoing recession has changed the financial picture drastically for many residents, and their buildings are feeling the effects of late and missing assessment payments, owners unable to pay special assessments, and even owners who withhold maintenance payments for the same reasons rental tenants withhold rent: They may feel that nonpayment punishes the board or management for some shortcoming—real or perceived. A building’s assessments are used to pay for routine cleaning of common areas, door personnel, amenities and unexpected issues such as roof damage, balcony repairs and other problems, but if someone doesn’t pay their share, it can quickly lead to some very serious problems.
There are many reasons residents cite for nonpayment of their monthly dues and assessments: unemployment, other unexpected expenses or sheer forgetfulness. But the most common reason cited is that someone in the family isn’t working because they’re sick, says Marshall Dickler, an attorney with the law firm of Dickler, Kahn, Slowikowski & Zavell, Ltd. in Arlington Heights. Another common reason for arrears is a divorce or separation that leaves a resident short of cash. In the case of elderly residents, isolation and forgetfulness may play a role. In the worst case scenario, a resident may have died without a person appointed (or willing) to handle their estate.
“After that, it usually is something like money management, where the owner has built up debt and can’t juggle or make all of their payments,” Dickler says. “Believe it or not, we see a tremendous amount of this in January and February, after Christmas purchases that can’t be paid for with savings or cash flow.”
In Illinois, there are no figures that have been publicly compiled for the number of co-op and condo buildings that are dealing with delinquent owners. But Angela Falzone, a consultant with Association Advocates, Inc. in Chicago, says that out of the 42-unit townhome complex that she manages, there are three foreclosures and three serious delinquencies—and the number of problem residents is growing. According to national real estate research firm RealtyTrac, Illinois had 33,092 total foreclosure filings in the first quarter of 2011 to rank it among the top ten active states.
Duty vs. Do-Gooding
For condo boards and management agencies, the key is to figure out how long they should wait before initiating collection procedures—and determining if a grace period should be made for special circumstances such as illness or unemployment. The general consensus is to refer the delinquent unit owner to the association attorney when the delinquency hits 60 days.
“Most management companies recommend the same timeline,” Dickler says, explaining that anything short of two months doesn’t give the unit owner much opportunity to find a way to pay their assessments, while anything longer may expose the association to major loss. And while the associations typically don’t grant a grace period if someone becomes unemployed or ill beyond the 60 days, they may if there is some effort to pay a partial amount of the assessment, or if there is a large arrearage and the owner begins paying current charges and some amount toward the arrearage.
Dickler says the board of directors are the only ones who can decide if there is any arrangement they want to make due to special circumstances. “The problem here however, is that the association is not a charity,” Dickler says. “Typically, board members have a fiduciary duty to collect assessments. That is absolutely true in Illinois. They cannot defer collection of assessments and impose that burden on other owners.”
Still, the association could acknowledge that in this economic downturn, sometimes people need a little extra time, Falzone says. After the 60 day grace period, it’s always a good idea to ask the owners what the problem is—and see if a solution can be created. “But don’t let this get too far,” she says. “If the owner really can’t pay or is out of work, the chances are the unit is also going into foreclosure, and the board will lose the ability to get their money, as the bank has the collateral.” While the board can make determinations on their own, they must use good judgment to protect the association or the building as a whole, Falzone says.
When the association decides that it has given a delinquent owner enough time to come up with the money to no avail, there are a few options available to collect the unpaid assessments. In every state, the association can bring a standard type of collection action and try to seek a personal judgment against the owner. In addition, the assessment will constitute a lien against the property. The association can file a lien so there is recorded notice to everyone that the unit owner owes money, Dickler says. "However, except for those states where there is a assessment lien priority, the assessment lien is subordinate to first mortgages, and in many instances, subordinate on all mortgages,” Dickler warns.
The assessment lien can be foreclosed just as a mortgage, but again, the mortgage would be first. Depending on the circumstances, the association may be able to foreclose subject to the first mortgage, or it can pay off the first mortgage.
In Illinois specifically, attorneys can bring an eviction action against an owner for unpaid assessments and other charges. While the legal fees will accumulate, the associations shouldn’t be monetarily damaged in the long run, however. In almost all states and under nearly all declarations, the association can recover its attorney fees and costs for pursuing recovery of unpaid assessments.
The association may be short of money while it’s waiting for the delinquent owners to pay or the courts to make an action, but while it’s in a holding position, the association should also be tacking on late fees. The amount of late fees is something the association should have written into their declaration—but determining the appropriate number is difficult. The range of late fees charged from building to building and state to state is extreme, Dickler says.
Some older declarations that were written for Federal Housing Administration (FHA) and Veterans Administration (VA) loan approvals have as little as $10 late charges. They can’t be legally changed because they were written into the governing documents. But other buildings charge as much as $100 or more in order to make sure that the unit owners take their assessments seriously and pay on time. In addition to late fees, many buildings have the ability to charge interest on unpaid assessments, Dickler says.
In Illinois, interest on judgments is at about 8 percent. So in condos in municipal areas such as downtown Chicago, Dickler says he’s seen late charges of around $250. “That is not unreasonable in associations where the assessments are twice that or greater,” he says. “At least one judge that we appeared before has agreed that late charges could be as much as the assessment. There is some case law limiting how the late charges can be applied. Generally, in Illinois, you cannot have late charges on late charges.”
These fees add up quickly, but the association and the attorneys involved can help make it a little easier on the unit owner. If the owner has already been turned over to the attorney, all payment structures must be through the attorney, and payments must be made directly to the attorney, Falzone says. But if the board remains in control of the process, they generally try to get a current payment, and some form of payment on the outstanding balance. If the owner can’t do both, then they must make a payment every month, hopefully equal to the current monthly payment, she says.
If all those methods fail, and the unit owner is still completely delinquent, the board can turn the unit owner over to the attorney, who can demand a 35 day notice all the way up to eviction so the association can rent or sell the unit. The bottom line is that none of this is good for the other homeowners.
“There may be no way to recover that shortfall from the units or unit owners that are delinquent if there are foreclosures and bankruptcies,” Dickler says. If a number of delinquencies accumulate, the association may have to increase the assessments for all units across the board to make up for the losses. In some cases, a special assessment will be required to cover the shortfall. Even if the unit owner continues to pay his mortgage and taxes, he can still be evicted for failing to pay assessments, Dickler says. They can be evicted even if they have filed for bankruptcy.
Once evicted, a renter can move into the unit for 13 months, and the association can collect the rent and apply it to the arrearage, and to other expenses, and will not have to pay the mortgage or the taxes. But, Falzone says, the unit owner’s attorney usually advises them not to pay their mortgage payments, but to continue paying their assessments, and let the unit go into foreclosure. That process can take as long as two years.
“The reason is that not paying assessments can result in legal action, and eviction is much quicker,” Falzone says. Throughout the process, the association’s accountant, management company and attorney may all play a big role. Management generally coordinates the activities of the association, so they’d advise the attorney to begin action and transfer all the information necessary to the attorney to start an action. The accountant for the association may keep financial records. The attorney would handle the eviction action, and would send out the notice and demand letter, because technically, that’s the first legal document in the long eviction process.
Danielle Braff is a Chicago-based freelance writer and a frequent contributor to The Chicagoland Cooperator.