To Lien or Not to Lien
Aggressive Pursuit of Delinquent Assessments is Critical for the Fiscal Health of Your Association
Associations are non-profit corporations that rely on zero-sum budgets for operational and reserve expenses. In other words, an Association’s annual budget does not account for an income margin like “for-profit” corporations. As such, it is imperative that projected assessment revenue is received in a timely manner for the fiscal health and successful operation of your Association. Because there are no “margins” to cover revenue shortcomings, the result of chronic delinquencies is regular assessment increases or one-time special assessments. To avoid such unanticipated assessment increases, the aggressive pursuit of delinquent assessments is imperative. A sensible collection policy combined with diligent collection efforts can mitigate escalating delinquencies and budget deficits. Thankfully, there are numerous tools available for your Association to take meaningful action to collect delinquent assessments, including timely delinquency notification letters, late fees, pre-liens, liens and foreclosure options.
Delinquency Notification Letters & Late Fees
The first step in the Association’s Collection Policy should be a Delinquency Notification Letter, mailed out the day after the assessment is deemed delinquent. Most Association assessments are due on the 1st of the month and late after the 15th, but you will want to review your Governing Documents to confirm this is the case for your respective Association. If so, Delinquency Notification Letters should go out on the 16th, immediately following the due date via United States Postal Service (USPS).
The amount of an Association’s late fee is typically governed by the CC&Rs, but oftentimes allows for flexible options at the Board’s discretion. For instance, CC&Rs may state late fees are $10.00 or 10% of the assessment amount. In most cases Boards will want to maximize the late fee allowable per the Governing Documents to encourage the timely payment of assessments.
Pursuant to California Civil Code, certified pre-liens can be issued once an assessment is 45 days or more delinquent. Board approval is not required to issue a pre-lien. At PMP, our Delinquency Team automatically generates and issues certified pre-liens as soon as an account is 45 days delinquent. Because pre-liens are sent certified, Associations will have documentation indicating whether the pre-lien was successfully delivered. Regular USPS delivery is required if the certified pre-lien is returned undeliverable, so in the interest of being proactive our Delinquency Team mails out the pre-lien via USPS simultaneously with the certified pre-lien to avoid any unnecessary delays in the collection process. Important note: An Association may only file a lien for delinquent assessments, late fees and collection expenses, not violation fines.
Per California Civil Code, an Association’s Board of Directors may approve to lien a property once it reaches 75 days delinquent, so long as the pre-lien was sent out 30 days prior to the Board’s vote to lien. This is why our team is diligent to send out the pre-lien notice once an account is 45 days delinquent. Unlike the pre-lien, the Board must approve a lien during a properly noticed General Session Board Meeting. It goes without saying that the Board will want to reference the property’s assessor parcel number or account number when voting on delinquency actions so as not to disclose the name or address of the owner. This Board action needs to be memorialized in the General Session Meeting Minutes, which is crucial in case the lien is ever challenged.
So long as the lien is drafted correctly, it will include both the current delinquent amount as well as the on-going accrued delinquent amount. At PMP, our Delinquency Team handles the drafting and processing of liens for our Association clients at significantly discounted rates when compared to law firms and third-party collection companies. All steps of the delinquency process are tracked and conveyed to our Board Member clients via our delinquency tracker, which is included in your Association’s Board Package.
Liens are crucial to secure the Association’s financial interest in the property. So long as there is a lien recorded against the property, the Association’s financial interest represent an encumbrance on title. The only way to clear title is to pay the outstanding balance in full to have the lien released. In other words, the owner will be unable to sell the property until the delinquent assessment amount is paid in full and the lien is released. The only times the lien may be extinguished without payment of delinquent assessments and collection fees are in cases of bank foreclosure on the home or bankruptcy, which are hopefully very rare.
Once a delinquent assessment balance reaches $1,800.00 or one-year delinquent, whichever comes first, the Association’s Board may vote to foreclose on the unit. Unique to Associations, Boards may pursue either non-judicial or judicial foreclosures. Non-judicial Foreclosure – Non-judicial foreclosures are not unlike when a bank forecloses on a home. As the name implies, there is no need for a court hearing to pursue this type of foreclosure. When an Association pursues a non-judicial foreclosure, they are foreclosing on the lien, assuming possession of the property, and can rent out the property to recoup the delinquent amounts owed. It is important to keep in mind that the mortgage lender still has first right to the property, so they can (and will) eventually foreclose on the property and assume possession. However, until such time the Association may lease it and collect rents until the delinquent amounts owed are paid in full. Once the lender takes possession, they are then responsible for paying the Association assessments. Note, the Association does not have an obligation to pay the bank mortgage when taking possession of a property. The mortgage was an agreement between the owner and the bank, not the Association.
The process to pursue a judicial foreclosure is not unlike a nonjudicial foreclosure, but with a judicial foreclosure a court hearing is required. Your Association’s attorney must go before a judge and pursue a money judgement, whereby the Association will seek the authority to lien the owner’s bank account(s) and garnish their wages in lieu of taking possession of their property. The right to lien the owner’s bank accounts(s) and garnish their wages is good for 10 years and can be renewed every 10 years indefinitely. Because judicial foreclosures are handled by the Association’s attorney and require a court hearing, they are typically more expensive than non-judicial foreclosures.
The decision whether to pursue non-judicial or judicial foreclosure will depend on numerous variables specific to your respective Association and the delinquent owner’s property profile. Our Delinquency Team along with your Community Manager can help guide your Board on your options and which is best for your Association. While PMP does not handle the non-judicial foreclosure process internally, we have partnered with several reputable collection firms to handle such foreclosures. Judicial foreclosures are handled by the Association’s general counsel. All costs associated with the collection of delinquent assessments, including legal and court fees, is the owner’s responsibility to pay, and are accrued as part of the lien on the property.
Board Members are encouraged to review their Association’s Collection Policy to ensure it reflects the diligent pursuit of delinquent assessments, as outlined above. Unique to PMP is our in-house delinquency department, that tracks all member delinquencies and prepares a custom delinquency tracker for the Board’s review at each Board Meeting. Our team would be happy to assist your Association with the review and updating of your Association’s collection policy.
If you have questions or additional requests for information, please feel free to e-mail Brad Watson, President of PMP, at mailto:bwatson@PMPmanage.com
Please note: PMP is not a law firm nor are we attorneys. Nothing contained in this DR HOA column should be considered legal advice. Follow up legal questions should be addressed with your Association’s attorney.