What Happens When Condo Assessments Go Unpaid?
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As more struggling condo owners have stopped paying their condo assessments, condo associations nationally are becoming increasingly aggressive about finding ways to recoup unpaid fees. This article explores the options in Vermont for condo associations dealing with late assessments.
If you own a condominium, you know about assessments. It's the bill you pay every month, or quarterly, for your share of common area maintenance, insurance, reserves and whatever else the Association's board of directors decides to include in the annual budget for "periodic" assessments. Your share of the annual budget or your annual assessment is the fractional interest you own in the common area.
Sometimes there are "special" assessments. They may cover unexpected repairs to roofs or parking areas, or an unexpected lawsuit not covered by insurance. When such expenses occur, the board of directors will vote a special assessment to cover the cost. Again, you pay your share.
Why Assessments are Going Unpaid
It used to be that condominium owners paid their assessments regularly without much difficulty. Sometimes an owner would fall behind, but the property-management company or board of directors would often work out a plan for the unit owner to bring the account current and the back amount would eventually be paid. If the owner didn't pay, the balance would usually just accrue until the owner sold his unit and the amount was paid out of the sale.
All that has changed with the Great Recession and the real estate implosion. Today, there are many unit owners who do not pay their periodic assessments in a timely manner, much less special assessments. In fact, many owners can't pay or are willingly not paying their first and second mortgages. With the fall in real estate values, particularly recreational or second home condominiums, many owners are "under water."
One of the first things to happen when finances get tight is people stop paying their association bills. Some owners will even pay on their mortgages, but let the condominium association assessments slide. They must think there's less risk in keeping up the bigger mortgage at the expense of the smaller assessment bills. But that's a mistake. For one thing, not paying assessments is a violation of the mortgage.
What the Associations Can Do
What's an association to do? Well, it turns out that Vermont property laws give a lot of fire-power to the Association. (The laws are contained in Title 27A of the Vermont Statutes.)
In the first place, the law gives an automatic lien in favor of the association for all sums due, periodic or special, plus late charges, fees, fines, and costs of collection, including attorneys fees. Except for taxes, this lien is superior to all other liens and encumbrances, including mortgages. (That has to be qualified a little: for past assessments not paid, the association has a priority over first mortgages only for those assessments that are 6 months or less overdue at the time the Association takes action to enforce its lien.
However, thanks to a recent decision from the Superior Court of Windham County – Docket No. 193-4-10 Wmcv – on behalf of one of our condominium association clients, the association's lien retains priority for all assessments after the time it takes action, including right up to the date of the judicial sale.)
An Association CAN Bring a Foreclosure Lawsuit
What must an association do in order to preserve this priority for all of its assessments? It has to begin a legal action to collect the amounts due before six months pass. By far, its biggest weapon is… you guessed it… a FORECLOSURE suit. The association can sue for the amount due and foreclose its lien just like the bank sues for the amount due on a note and forecloses its mortgage.
The process is straightforward. The association sues the owner and requests payment or foreclosure from the court if payment does not occur. Unless the owner has some defense (hard to imagine), the court grants a judgment of foreclosure and orders that the property be sold at a judicial sale if the owner doesn't pay up. The owner is given a period of time to "redeem," usually thirty days to six months (the association should seek as short a redemption period as possible if the property is not a primary residence). If the owner doesn't redeem, the association must sell the property at public auction within six months. It gets paid all its overdue assessments, fees, costs and attorneys fees, first out of the proceeds of sale.
What About the Bank Holding the Mortgage?
Ah, you say, what about the bank? It is the elephant in the room and there's no ignoring it. SPECIAL REPORT the consequences. After all, condominium projects depend on the cash flow from assessments. It is important that the association have a firm policy regarding delinquencies, communicate it to their membership, and take action when someone falls behind and is approaching that six month period of delinquency. The clock is ticking for the association to recover its full priority and it must go to court to protect it. Otherwise, once it falls behind a mortgage, the likelihood in this market is that the amount of the mortgage, interest, penalties, and costs to the bank will exceed the proceeds of the sale.
Actually, the bank often begins its foreclosure proceeding first and names the association as a party defendant. (Even if the association starts its suit first, the bank(s) with mortgages are also named as defendants. The association's suit often causes a payment of assessments to occur, sometimes from the bank!) . When the bank does start first, the association should answer the bank's complaint and simultaneously file a cross-claim for foreclosure of its lien against the defendant unit owner. That establishes the "action" point of the association to assert its retroactive six-month priority for delinquent assessments over the first mortgage bank.
When a bank is involved, at some point there is communication between the lawyers. The growing practice is for the bank and the association lawyers to work out an agreement on the form of foreclosure judgment that they will submit to the court – a stipulated judgment order. It sets out the various amounts due all parties, the priorities, who will conduct the judicial sale (usually the bank) and other details of the sale.
Who Get's Paid First?
Prior to the Windham Superior Court decision, there was some wrangling over how much priority the association would get. Banks' attorneys tried to limit it only to six months tied to the date of the Association's complaint, which would mean a year or more could go by with the Association losing its priority and right to be paid first. But the court decision settled the issue very favorably to associations. Except for anything delinquent more than six months prior to the date of filing an action or cross claim, the association is first in line for everything it is owed. (Note that this decision was not appealed, and other superior courts in Vermont are not obligated to follow its approach.)
Things can get complicated and very technical in foreclosure suits, especially where there are multiple parties, such as first and second mortgagees, the association, and possibly other creditors. It is important that the rules are followed scrupulously, lest the foreclosure is deemed defective late in the process. As it is, from suit to judicial sale can take a year or more. In our experience, courts are not lenient to missed deadlines or dilatory tactics, especially by the larger banks in light of the many issues that have been well covered in the news.
Anyone who serves on the board of directors of a condominium association knows how difficult the job of collecting assessments has become. Certainly, starting a foreclosure suit against a fellow unit owner isn't a pleasant task. Unfortunately, however, it has become a necessity given today's rates of delinquency and the consequences. After all, condominium projects depend on the cash flow from assessments. It is important that the association have a firm policy regarding delinquencies, communicate it to their membership, and take action when someone falls behind and is approaching that six month period of delinquency. The clock is ticking for the association to recover its full priority and it must go to court to protect it.
Otherwise, once it falls behind a mortgage, the likelihood in this market is that the amount of the mortgage, interest, penalties, and costs to the bank will exceed the proceeds of the sale.
William H. Meub is the senior partner of Meub Gallivan & Larson, Attorneys, P.C., a full service law firm located at 65 Grove Street, Rutland, Vermont, 05701. Web: www.yourvtlawyer.com. Phone: (802) 747-0610. The firm represents a number of condominium associations.