Dealing with Delinquent Owners

Denying Access to Common Areas

By W. B. King

By and large, a board and management company can expect payment from residents for monthly fees to be received on time and in full. These all-important funds keep day-to-day operations moving forward without delay. There are situations, however, that arise which can offset the balance sheet. Circumstances run the gamut but in the end, monies that can’t be collected end up costing a whole lot more than the losses they represent.

“Most owners stop paying their assessments because the value of their home is less than what they paid or owe on the mortgage,” says Adam P. Freedman, principal at JKM Services, a consulting firm that specializes in real estate management and receivership services.

While in some cases failure to pay might be linked to logical reasons such as a person lost their job or became ill, often times a reason is not provided. “People have a tendency to slide off the landscape,” says Steven J. Weil, PhD, EA, LCAM and president of Royale Management Services in Fort Lauderdale. “They don’t call up and say I’m not going to pay, they just stop paying.”

At the beginning of the year, Florida’s unemployment rate hovered around 10 percent. With more people remaining out of work or losing their jobs, the ability to make monthly payments above and beyond the necessities becomes a significant problem for many. “In some cases, people will wait until they are foreclosed upon and then move elsewhere and perhaps rent, but they don’t tell you that is what they are doing (obviously),” says Jay Steven Levine, attorney and founder of JSL Law Group.

There are certain circumstances when a resident will withhold payment due to unresolved issues or feelings of entitlement. “If a property is under water and there is no equity, investors will use that as an excuse not to make payments,” says Levine. “Once in awhile there is dissatisfaction with maintenance or amenities and people think they do not have to pay but that is not a legal defense.”

Mediation Before Litigation

The way in which a board determines how to handle collecting monies that are past due is always different as respective bylaws dictate the course of action. In most situations there is a grace period between five and 15 days after the payment is due which is usually the first of the month. “The grace period is usually set forth in the association’s governing documents,” says Freedman. Since boards are populated by unit owners, it is possible for certain tenants to be given partisan treatment; however, this is not legal and seriously frowned upon. “Board members are not able to give preferential treatment to an owner,” adds Freedman.

While most boards have an attorney on retainer, they depend on their management company to keep them apprised of any delinquencies. This communication chain of command can add more time to the situation. For example, if a resident misses a payment, the management company will normally not send a notice to that resident until the grace period is over, and in some cases will wait weeks longer. The management company will inform the board at the next monthly meeting. So before any action can be considered, and providing the resident didn’t make good on the first missed payment, the delinquent resident will likely have missed two payments before any serious action is taken.

“It depends but I recommend that a board pick a policy between thirty and sixty days. After the due date, a notice should be sent no later than thirty days, but while most boards agree to this they don’t always comply,” says Levine. “There have been late payments of one to two years so obviously it wasn’t correctly addressed.”

On average, residents that do not pay will not pay regardless of mediation attempts or late payment notices, but there are exceptions. “We work closely with our boards to get authority to deal with these issues,” says Weil. “For example, if the non-payer comes forward and explains that their car broke down and they used the monthly fee money to fix the car so they can get to work but want to set up a payment plan, we are amenable to that because it means they will not fall further into the arrears and we can often forgo any late payment charges.”

Depending on the board, the rules for collection of delinquent fees are usually covered in the bylaws or “house rules,” the propriety lease, the offering plan, or management policy. Boards generally prefer that if a written notice doesn’t spur activity to have the management company call the resident directly. “Some boards will reach a payment arrangement where the owner at a minimum is paying the current monthly assessments plus an amount to make up any payment in arrears,” says Freedman. “It is best to require the owner to pay back their arrearage over a period of less than six months.”

Banks and lending institutions penalize a person for being late on a car loan payment or credit card payment with a late charge. Most boards also have this policy in place but often do not immediately enforce it. Their main goal is trying to recoup monies lost and up and until legal counsel is brought into the picture, they look to remedy the situation with as little cost as possible.

Levine explains that boards can apply five percent of the delinquent installment or $25, which is ever the greater of those two mathematical calculations. “Depending on the housing type, the right to charge the late fee depends on the governing documents,” says Levine. Freedman adds that boards can also charge interest, from 5 percent to 18 percent. “This is set forth in the governing documents for the association,” says Freedman.

During this time period a board that is experiencing a shortfall of funds maybe be forced to conduct a special assessment to make ends meet, especially in this economic climate, explains Levine. “Unfortunately, the other owners have to make up the delinquencies. So what many associations are doing now is creating bad debt reserves. We recommend this because it not only covers unforeseen expenses but money lost from non paying owners. Paying owners do like this but that is the reality.”

Ultimately, the old adage of a few bad apples upsetting the apple cart is realized. Residents are not without recourse in that they can request information from the board as to who is not making payments. They are not allowed to harass the delinquent party due to governing laws and other legislation; however, they are entitled to know why a special assessment was executed and why their monthly dues increased.

Suspending Privileges

Charging late fees, filing liens and starting foreclosures is the most common avenue and method to persuade members to pay; however, many associations also have the ability to suspend privileges to any member in arrears. The theory being that the assessments pay for those privileges and if a member is not contributing to the cost of those privileges and/or amenities, then they can be deprived of the benefit of using them.

According to Lisa Magill, a shareholder attorney in the Fort Lauderdale office of Becker & Poliakoff, P.A., a number of legal cases have been brought regarding access and suspension of privileges based upon recently passed Florida condo and HOA statutes.

The Condominium Act was amended, effective July 1, 2010, to allow associations to suspend use rights in the event an owner is more than ninety (90) days delinquent. Section 718.303, Florida Statutes says in part: “If a unit owner is delinquent for more than 90 days in paying a monetary obligation due to the association, the association may suspend the right of a unit owner or a unit’s occupant, licensee, or invitee to use common elements, common facilities, or any other association property until the monetary obligation is paid.”

There is a similar provision in the statutes that govern homeowners' associations operations, as well. Section 720.305, Florida Statutes likewise states (in part): “If a member is delinquent for more than 90 days in paying a monetary obligation due the association, an association may suspend, until such monetary obligation is paid, the rights of a member or a member’s tenants, guests, or invitees, or both, to use common areas and facilities and may levy reasonable fines of up to $100 per violation, against any member or any tenant, guest, or invitee.”

Magill cites a Sun-Sentinel story involving Quail Run, where close to 100 condo owners were shut out of using the pool, clubhouse and other Quail Run recreational facilities, even though a very small minority were behind in paying their maintenance fees.

“Thus, it is evident that the association (whether a condominium association or a homeowners' association) has certain remedies available to it against a delinquent owner. The question here is whether this punishment may be imposed against all owners in a particular sub-association when some are delinquent and others paid in full,” Magill notes.

The story got national attention in the media and a judge ultimately ruled that the Boynton Beach condo couldn’t penalize non-delinquent owners. The condo remedied the situation by changing the locks on its amenities to prevent delinquent owners from accessing the facilities.

Whenever legal action is taken, it can take months if not over a year or more for the case to be settled. During this time period, the resident in question can be subjected to restrictions such as the use of common areas or recreational areas; however, this is often hard to enforce and requires additional oversight and expense in the way of staff that is usually not available. In Florida, the statutes do not permit boards to deny ingress or egress to the complex or take away parking privileges.

“Boards have the right to withhold services, such as use of the facilities but the trouble is that it only works if you are top amenity building that has staff in place to enforce the restrictions,” says Weil. “If there is no staff in place, then it becomes the responsibility of the management company or the board of directors. This is a difficult choice for a board to make because it doesn’t make economic sense often and might cause more troubles than already exist.”

The nation’s consumer protection agency, the Federal Trade Commission (FTC), is the entity that enforces the Fair Debt Collection Practices Act (FDCPA). This prohibits debt collectors from using abusive, unfair, or deceptive practices to collect from a delinquent party. Under the FDCPA, a debt collector is defined as a person who regularly collects debts owed to others and includes collection agencies, lawyers who collect debts on a regular basis, and companies that buy delinquent debts and then try to collect them, notes the FTA.

“As managers we have to comply with this Act so we can post signs or do anything that can be considered harassment when trying to collect,” says Weil. “Their names are not publicly published but residents can request the information. Owners are entitled to see the records. We offer this service through a web portal for our owners. While residents are entitled to this information, a board or management company cannot name deadbeats.”

In his experience, Levine explains that when dealing with delinquencies, the best case scenario for an association is if the person continues to make mortgage payments while failing to pay monthly assessment fees. “This is usually an owner who doesn’t want to lose the property and will most likely pay in the end,” says Levine. Otherwise, a foreclosure/eviction process unfolds. While timely and costly, for many associations, it is the only way to cut losses and move forward. “When a trial judgment for foreclosure is received and the property is sold, the court puts into the final judgment that the association or investor is entitled to a writ of possession which means the sheriff can remove the person from the property at gun point,” says Levine.

W.B. King is a freelance writer and a frequent contributor to The South Florida Cooperator.

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