COLLECTING ASSESSMENTS IN THE AGE OF COVID-19
By: Michael W. Rabkin, Esq.
April 15, 2020
The California economy continues to be devastated by COVID-19. More than 1.6 million unemployment claims were filed in California during the last two weeks of March, and there is currently no end date for the statewide shuttering of nonessential businesses. For most homeowner associations, regular assessments are due on the 1st of each month, and are delinquent if not paid by the 15th of the same month. Many homeowner associations are bracing for a spike in delinquencies on April 15, 2020. Some boards of directors have already been approached by homeowners financially impacted by COVID-19 who are requesting temporary relief from their obligation to pay assessments. Boards will be challenged in the next few months to balance the financial needs of their homeowner associations against unprecedented and sudden financial devastation being experienced by some homeowners. As explained below in more detail, boards of directors must be very thoughtful in the policies they adopt with regard to the collection of assessments from distressed owners, and very careful in how they respond to, and perhaps most importantly, the language they use (as discussed below) in responding to, these types of requests.
Associations Need Money to Operate
Associations have ongoing expenses – insurance, utilities, gardeners, maintenance and repairs, property management, accountants, reserve study preparers, attorneys, etc. that must be paid to preserve and protect the property improvements and the owners. Board members have fiduciary obligations to safeguard the financial condition of their communities and to ensure they have sufficient funds to keep operating. While there may be some minor steps that boards can take for a short period of time, ultimately, there will be no way for associations to continue to operate if they defer the collection of assessments for too long.
Also, it is important for boards of directors to remember that whatever modified collection policies they may adopt in response to COVID-19 must be applied equally to all homeowners. Furthermore, it is important that boards of directors remember that in exercising their fiduciary duties, they need to act in the best interests of the Association as a whole, not their individual interests. If board members are seeking temporary relief from the collection of assessments, they should consider recusing themselves from the decision-making process.
An Owner’s Obligation to Pay Assessments Should Not Be “Waived,” “Deferred,” “Delayed” or Otherwise “Forgiven”
All owners are obligated by their associations’ governing documents to pay assessments to their associations, and no correspondence or communications between associations and owners should suggest or state that an owner’s obligation to pay assessments is waived, deferred, delayed or otherwise forgiven during this time. As discussed below, boards of directors may make business decisions to delay the implementation of their associations’ collection policies in response to the economic devastation being caused by COVID-19 and “Safer at Home” guidelines. However, to be clear, these monies are due and owing by all owners to their associations. It is essential to avoid using language which suggests otherwise as it could impair the future ability to collect these assessments from owners.
To provide temporary economic relief, some boards of directors have made a business decision to suspend some or all of their contributions to reserves for the next few months and to “pass through” this “savings” to their owners. Again, boards need to be careful with the language used to communicate such a decision to owners so that they do not impair their future ability to raise regular assessments by up to 20% per fiscal year based on the pre-COVID-19 regular assessment amount (not based on the current amount less the contribution to reserves). We believe this should be phrased in terms of a monthly “credit” being issued by the association to each owner’s account as opposed to a temporary reduction in the amount of the monthly regular assessment.
Collection of Delinquent Assessments
Delinquencies Arising as a Result of COVID-19. Some owners may become delinquent for the first time as a result of COVID-19, and request some sort of relief from the Association. Board members will need to make a good faith decision as whether it is in the best interests of their associations to do so.
What type of “temporary relief” can boards of directors grant? Boards could, among other things, defer the collection of delinquent assessments under their association’s collection policies for a certain period. So, if boards typically commence collection activity after an owner is delinquent in the payment of assessments for more than 60 days, boards could decide to defer collection activity until an owner is delinquent for 90 or 120 days. Boards could decide to forego collection activity if the owner brings his or her account current by a certain date, e.g., July 1, 2020. Boards could decide to forego collection activity if the owner re-commences paying assessments on a certain date, e.g., July 1, 2020, and pays $X amount each month towards the delinquent assessments. Boards could also waive interest and late charges for the same period of time. Whatever policy boards adopt should be in writing and should be made subject to the owner seeking relief agreeing in writing to such payment arrangement.
Also, boards need to decide in advance what documentation they will require when reviewing an owner’s request for relief from collection to support the claim that assessments are not being paid due to the COVID-19 pandemic.
Delinquencies Which Existed Before COVID-19. Some owners have been delinquent in the payment of assessments to their associations for months before the pandemic.
No Lien Recorded Yet. If an owner has been delinquent for more than one year or the delinquencies exceed $1,800, if it has not done so already, the board should consider proceeding with the initial collection activity (up to, and including, the recording of a lien against these chronically delinquent owners’ homes) in order to help protect their associations’ future ability to collect these significant sums of monies.
Lien Already Recorded. If a lien has already been recorded against an owner’s separate interest for delinquent assessments, or once a lien is recorded, upon request, a board could decide to delay any action to foreclose on such lien for a certain period. Again, there should be a writing signed by the delinquent owner evidencing the owner’s understanding that the board’s decision to delay a judicial or nonjudicial foreclosure action is for “X” months only.
Payment Plan Already. Some delinquent owners who had entered into payment plans with their associations prior to the pandemic may seek temporary relief from the payment plan. Boards have the discretion to grant such relief for a certain period, e.g., 3 months, but the parties should agree in advance in writing what happens at the end of such period. That is, does the delinquent owner have to “catch-up” under the payment plan by the end of such 3 months or just start making payments at the end of 3 months (and the payment plan is just extended by 3 months)?
These are clearly unprecedented and stressful times. There is simply no way to predict how long this economic downturn will last. Any relief discussed above should be short-term so that boards have the flexibility to pursue the collection of delinquent assessments relatively soon to protect the finances of their associations.
Boards should work with their property managers and attorneys to craft a policy that best fits their associations taking into account the size, budget and finances of their individual associations.
If you have any questions, please email or call me.
Michael W. Rabkin
310.478.4100 ext. 6617