If a unit owner has trouble making mortgage payments, can non-payment of condo fees be far behind? In what feels almost like a “tough love” scenario, experts are encouraging condo boards to be proactive about collecting late fees, even though New England communities have not been hit as hard as those in other parts of the country.
David A. Levy, CPA, of Brookline, Massachusetts, advises condo boards to “keep a close eye on ‘aging reports’” that reveal how long it is taking to collect the revenue needed for regular maintenance as well as long-term, capital expenditures. He is personally observing situations where “an association may be on-budget, but receivables are growing… from 30 - 60 days out to 60 - 90 days.” This trend has not been as severe in New England as in other regions, he says. “I’m reading about it [foreclosures] but I’m not seeing it first-hand.” He contends that condominium communities in this area may be more well-established, and notes that, “owners with a lot of equity are not going to default on their mortgages.”
However, Levy points out that associations have no way to know the status of mortgage payments by unit owners, which might serve as a warning bell. “If they’re not paying their mortgage they’re probably not paying their condo fees either,” he states, adding, “While the bank or mortgage company is settling up with the homeowner, [such as] re-writing the note or starting foreclosure, will [either party] pay the condo fees?”
If a condo sale or re-financing of a mortgage is pending, a 6-[d] certificate will be required at the closing, Levy notes. This is essentially a document obtained from the Board of Trustees that states all fees, fines, assessments or other monies due to the association are paid up. This assurance of fee payment only applies when there is a buyer. In the case of a pending foreclosure, the association fees may get lost in the line-up of creditors.
In most states, community associations have no special status when a unit owner stops paying maintenance fees. But in Massachusetts, the state’s condominium statute includes a so-called “super-lien” provision (Chapter 400 of Mass. General Laws 183A), that allows the association to assume the position of first lien-holder on a property about to default.
Boards Seek Guidance with FDCPA
Attorney Gary Daddario, an associate at Perkins & Anctil, PC, of North Chelmsford, Massachusetts, is director of that firm’s collections department, and serves clients in Massachusetts and New Hampshire. He notes that associations trying to collect late fees need legal support just to navigate their way through the federal Fair Debt Collection Practices Act [FDCPA] of 1966.
The act outlines specific rights that in-debt individuals have, but “it is so old,” he says, “it needs to be revamped… it’s not a good fit anymore.” It makes no provisions, Daddario says, for modern communications such as fax or Internet and it often conflicts with state-level collection laws. “It was originally intended,” he adds, “to protect consumers from unscrupulous or unlawful collection agencies, but now, even people practicing law according to the rules can get tripped up by FDCPA.”
When an association starts missing fee payments from a unit owner, the board usually opts to call in some legal help. Daddario outlines the steps in a typical case. “First, when the unit owner is 30-45 days late, we send a demand letter that offers a very simple outline of the debt situation and refers to people’s rights under the FDCPA. Then, 30 days after that demand letter, if there was no response, notices go out that include one to the unit owner and to the first mortgage holder, with a 60-day late warning; and another one to the first mortgage holder with the warning that if unpaid fees are not cleared up within 30 days, the association will file suit in court. When this complaint is filed [in Massachusetts], the ‘super-lien’ kicks in.”
Daddario notes that associations must move quickly in response to late payments, to maintain super-lien status with the original owner. If a mortgage lender begins foreclosure proceedings on a homeowner, the lender is only required to give the community association three weeks’ notice of a pending auction or foreclosure sale. The opportunity for simply collecting the past-due fees may diminish.
“The association is not really interested in owning a condo through foreclosure,” says Daddario, “… especially if it’s [eventually] held by a mortgage company or bank. The association just wants the fees that are due.” In most instances, the super-lien threat is enough to compel the owner or mortgage lender to pay past-due condo fees, he contends.
“Sometimes the problem can be resolved before legal fees become an issue,” he says, because that’s when any spirit of cooperation tends to disappear. “It doesn’t make sense to hit people hard [with threatening letters],” says Daddario. The first warning letter should prompt the homeowner to focus on the problem. “Sometimes,” he points out, “there’s an error somewhere” and the debt gets resolved without further consequence.
Foreclosure Procedure May Trigger Payment
Attorney Henry Goodman of the Law Offices of Goodman & Shapiro, LLC, in Dedham, Massachusetts, reports that in general, for this region, he is seeing condo foreclosures but nothing that compares to the downturns in places like Florida, California and Nevada. On the local level, he states, “We’re seeing them in working-class communities… not so much in the high-end developments”
He points out that a condominium association’s collection task is unique, “When a homeowner is not paying condo fees, all the other unit owners are paying the defaulted owner’s expenses, and that’s not fair. We recommend that if an owner is over 60 days in [fee payment] arrears, the condo board should turn the matter over to a lawyer for foreclosure proceedings. While board members may sympathize with the owner’s difficult times—no one wants to seem mean-spirited—they need to look out for the best interests of the entire community.”
In Massachusetts, at least, it would be unwise for a board to initially negotiate a payment plan with a unit owner—that might hold off or reduce fee payments—to help the owner get through a rough patch. This is because, Goodman points out, “it is essential to start [foreclosure] proceedings on schedule to preserve the priority lien which the association has under state law.”
The Massachusetts condo statute only protects the association for fees due within the six months preceding a foreclosure filing. The longer it takes for an association to take action against a default, the less protection the law provides.
Goodman has observed that when associations start foreclosure proceedings, the other lien-holder—the mortgage lender—generally steps in and pays fees, to protect their own interests. “That way,” he says, “the association may not have to foreclose after all… In fact, it’s been months, if not years, since we’ve had a client actually take a unit by foreclosure.”
One-On-One Approach Can Work Well
Daddario agrees that such extreme measures are rare, but says sometimes it’s the only option. “Once the case is in litigation… when the association gets a judgment, it usually includes the ability to attach rents …or foreclose on the unit, if necessary.”
He adds that even with the Massa-chusetts super-lien provision, associations must stay diligent in protecting communities against individual defaults—beyond just maintenance fees. “We are advising [Massachusetts] clients,” he notes, “that special assessments and other payments owed [by a unit owner] are not protected under the super-lien statute.”
And in other states, associations that are owed money must compete with other creditors that may have higher status, such as a mortgage-lender. Rules vary from state to state. In New Hampshire, says Daddario, “the condo statute requires filing a lien on paper and recording it at the registry of deeds… and it must be renewed every six months.”
An association trying to collect may be more successful taking a one-on-one approach instead of pressing forward in a lock-step of impersonal legal procedures. “Sometimes [the parties in default] surface at the very end of the process” and are willing to cooperate with the association, he reports. “In that case, we try to negotiate a fair and reasonable payment plan proposal—all in writing, which everyone, including all board members, must receive. If it’s reasonable and the association accepts the terms, a contract will be drafted in which the unit owner acknowledges exactly what [monies] are in default, how it will be paid and what are the ramifications of breaking the contract. At this stage, the mortgage company may be involved, as well.”
Ultimately, he states, “Our philo-sophy is to settle [a debt issue] before it gets to court.” Sometimes the unit owner can satisfy one but not all of his or her creditors. The association needs to be high on the payment priority list. And the association can gain a high priority if its collection callers are respectful instead of demanding. Daddario believes, “Given the choice, unit owners will spend their limited resources on [whoever] treats them with dignity…” even, perhaps, at the expense of other creditors.
The collection process may be daunting and complicated to association directors, but the association board is still the unit owner’s closest ally, compared to other creditors. As such, the association has an opportunity for collecting past due fees, especially if its directors understand, as Daddario insists, “It clearly pays to treat people fairly, and with respect.”
Marie N. Auger is a freelance writer living in Westminster, Massachusetts.