Past Due Assessments: What Should A Board Do?

In our previous post we talked about the importance of collecting past due assessments in order to maintain the value of your condo building. One of the things we mentioned was that legal action should be used only as a last resort. That is all well and good, but what does the board do besides communicating with the defaulting residents and initiating legal action?

According to the Law firm of Kovitz Shifrin Nesbit, as outlined in their pamphlet "THE ART AND PRACTICE OF COLLECTING DELINQUENT ASSESSMENTS" one of the first things a condo Board needs to consider is the establishment of a formal collection policy.

Why Establish a Collection Policy?

A formal collection policy is the foundation of a successful program in order to:

♦ Maintain necessary cash flows

♦ Reduce financial loss from owner defaults on assessment payments

♦ Establish and maintain reserves

♦ Present a sound financial picture to potential lenders for the association or a mortgage
company for potential purchasers

A board must establish a systematic approach to delinquencies. This can usually be done
by the board without owner approval. When a board formulates such a policy, it must be
communicated to the owners on an ongoing basis. An educated community is a well-run
community.

Consequences of Uncollected Delinquent Payments

By not having a tough but fair policy in place:

♦ Innocent owners’ assessments have to be increased to cover the deficit, either by way
of increases in the operating budget or through special assessments.

♦ Essential maintenance may become unaffordable and put off when needed.

♦ The property begins to appear run-down — which, in turn, reduces property values.

♦ Borrowing from reserves may become necessary to cover shortfalls.

♦ Disharmony may occur between paying owners and the board for its failure to take
action.

If the ratio of delinquencies to paid-up assessments is out of proportion, mortgage lenders may begin to reject applications and the association may not be able to obtain a loan to make essential repairs that need to be financed.

Establishing a Firm Collection Policy

To Establish a Firm Collection Policy

1. The board should consult with its attorney, accountant and manager to set up
guidelines. A formal resolution of the board should be adopted at an open meeting of members that:

♦ Specifies the problem

♦ Delineates the authority for taking the approved action

♦ Designates the procedures to be followed

♦ Designates the circumstances under which the procedures are required or permitted

♦ Establishes deadlines

The final policy should ultimately be included as part of the association’s handbook or
completed rules and regulations.

2. Set a firm due date for assessments and the levying of a late fee (usually the 15th
of the month), subject to the rules and regulations and Declaration.

3. Outline the steps to be taken by the manager or person responsible for collecting
assessments when a payment is overdue.

4. Allow for payment plans in cases of special need and financial hardship (so long
as it is not abused).

5. Specify when a delinquent assessment should be referred to legal counsel. The
manager should note that this is automatic once a delinquent account reaches a specified age or amount. (We generally recommend no later than sixty (60) days except in special cases.)

6. Provide for the collection of any costs associated with collecting delinquent
assessments and the assessment of attorneys’ fees at the time they are incurred.

7. It is critical that this policy be communicated to all owners ongoingly so there is
no question as to what the procedures are.

By waiting too long to turn over an account, an association may lose out if a mortgage foreclosure is filed against the unit or the owner goes into bankruptcy. In a foreclosure, the lender will assume ownership of the unit before the association has a chance to collect its money.