By Benny L. Kass
Saturday, December 1, 2007
I'm hearing a lot these days from condominium board members who are under stress because of financial problems at their associations.
They are starting to see many units go into foreclosure. The financial statement that the property manager sends each month indicates that a growing number of owners are delinquent in paying their association fees.
Yet the association still has bills to pay -- management and legal fees, water and electricity bills.
The board members who contact me want to know what to do. When a condo owner falls behind on monthly fees, the association should act. One step is to place a lien on the owner's unit. The lien puts the world on notice that the homeowner owes money to the association.
In some states, the association is required to file the lien with the recorder of deeds. In the District, however, there is an automatic lien from the time the assessment comes due.
Even where it is not necessary to record the lien, I recommend recording it anyway. Not everyone knows the local law. Recording will alert anyone searching title and considering taking action against the property.
One writer asked whether, when a property goes into foreclosure, the lien remains in force or the delinquent fees are gone forever.
It depends on where the condo is.
In many states, if a mortgage that is being foreclosed on was recorded on land records before the association's lien existed, the foreclosure will erase the lien.
However, in the District and 13 states -- but not in Maryland or Virginia -- there is some form of what is known as a super-priority lien. In the District, if the lender's mortgage was recorded after March 7, 1991, and the owner being foreclosed on is delinquent on association dues, the foreclosing lender is required to pay the condominium association up to six months' worth of those delinquent assessments.
Another board member asked whether a new owner who buys at a foreclosure sale would be responsible for the existing lien. The answer is no. If it is not a super-priority lien, the lien is lost. The new owner (or the bank if it takes back the property) remains responsible for future assessments.
However, the delinquent former owner still owes the money and can be sued. But it is doubtful that he or she has money to pay any judgment that the association may get in court.
Thus, one immediate suggestion: Do not let assessment debts get too large.
I believe in zero tolerance when it comes to association assessments. If the owner is delinquent for even one month, depending on the procedures spelled out in the association's legal documents, legal collection action should begin immediately.
Other board members have asked whether the association can cut off the services it provides to delinquent owners. The answer depends on state law, as well as on the association's legal documents. For example, if the association is paying the heating bills, many states will not allow heat to be terminated during the winter.
But other services, such as use of the swimming pool or the health club, can be stopped when an owner is not paying the assessments.
Before the board takes this step, it should advise the owner of the situation and invite him or her to attend a hearing before the board. The owner has the right to have a lawyer present and should be given an opportunity to explain why the services should not be terminated. Some states, including Virginia, require such a board hearing. I recommend it for all community associations.
Another board member writes: "As a board, we have the power to do yard maintenance and trash removal," and the costs "are included as part of our annual assessment. . . . Can we eliminate these services and let the owners work with vendors on a direct billing basis?"
That's an interesting idea, but I cannot recommend it. I have no problem with the board eliminating certain services, but to let owners arrange this work on their own could lead to chaos. You don't want a dozen or more trash trucks coming to the property each week.
More significantly, we all know that not everyone will want to participate -- or can afford it. That means some lawns will become overgrown and some properties will have trash piled outside for a long time. And in a high-rise condominium association, such a plan is completely unworkable.
But defaults and foreclosures strain the community and may require tough cutbacks elsewhere. Examine your expenses carefully; there is fat in almost every association budget. I suspect that the board, working with the property manager, could trim hundreds or thousands of dollars.
Some possibilities for boards to consider:
¿ Increase your insurance deductible. That should lower the annual premium. The downside of this is that you will have to pay more every time you file an insurance claim.
¿ Use the Internet well. Set up an association Web site. Official notices can be sent via e-mail or put on the Web. You may have to amend your legal documents because they may require that notices be sent by U.S. mail. You can still send information through the mail to residents who don't have computers, but using the Internet to communicate with the rest can save handling time and postage money.
¿ Identify lawyers and accountants who live in your community. They can be asked to volunteer to assist with occasional legal and financial questions. It is important to have independent lawyers and accountants working for the association, but using in-house professionals for limited advice may reduce your expenses.
¿ Get two or three bids for all work done by outsiders. Many times, property managers have ongoing relationships with service providers and feel comfortable working with them. But any job -- especially if it costs more than $5,000 -- should be sent out for bids.
¿ Consider selling advertisements in your newsletter. Some associations bring in revenue from local businesses that want to reach residents. These ads should be reviewed by legal counsel.
¿ Weigh charges for services not used by everyone. For example, why not impose a modest fee for guest parking or swimming pool passes? Some associations charge a yearly fee to use the health club or the tennis court.
Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address or contact him through his Web site,http://www.kmklawyers.com.
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