Rules and Assessments

If asked, many would say that the most important things a homeowners association takes care of are collecting assessments and enforcing the rules and regulations. In economically prosperous times, it’s a virtual no brainer–get a reserve study, create a budget, and assess accordingly. Associations need to design a concrete set of rules, an enforcement resolution, and a schedule of fines, and then stick it to the few who don’t voluntarily fall in line. Also in prosperity, the vast majority of owners follow rules accordingly, paying what they owe and allowing the association to have the cash it needs to take care of priorities.

What happens, however, when the economy takes a nose dive? In times such as these, owners start “forgetting” to pay assessments, foreclosed homes sit empty, and people have bigger worries than the proper placement of their garbage can or the condition of their lawn. The association’s cash flow dwindles, while weeds grow and paint peels. What is the board of directors to do?

Facing increased numbers of unpaid accounts, boards have several competing concerns. On the one hand, the board must meet the association’s financial obligations, with a duty to enforce the governing documents. On the other hand, pursuing delinquent owners can be expensive and, sometimes, fruitless. In addition, many boards question the morality of hounding owners over amounts that sometimes seem trivial. Unfortunately, there is no clear-cut solution that will work for all associations, but there are several options.

Perhaps the most obvious answer is the idea that the board should simply prevent the problem before it starts. This could mean revisiting the budget to make sure it is free of wasteful spending, or checking the schedule of fines to make sure it provides the needed disincentives without being unreasonably high. More importantly, it means addressing issues as soon as possible. If an owner hasn’t paid their assessments, waiting until several months [or years] go unpaid encourages further delinquency, increases the costs of pursuing payment, and lowers the amount the association is likely to collect. Likewise, if the association is fining an owner for a minor violation of the declaration, allowing the violation to continue and fines to compound doesn’t accomplish much. If the board addresses problems as soon as they appear, however, the association is much more likely to get what it needs with fewer feathers ruffled in the process.

This, of course, is the easy scenario; there are often much more difficult cases. Whether it is because of financial hardship, personal grudges, or a genuine factual disagreement, some owners will simply not cooperate. Several associations choose to ignore such offenders, rather than take on the expense and stress of collecting money owed. This alternative only creates a host of new problems: the association loses out on money it needs, and the board risks breaching its fiduciary duties by short-changing the association and unevenly enforcing the governing documents. Avoiding difficulties now will only create a much bigger mess later.

At the other end of the spectrum are those associations who draw a hard line; as soon as their documents allow it, they will sue an owner to collect any past-due amount. While this approach has the benefit of consistency, it can also be a real mess. If the association has not dotted every “i” and crossed every “t,” it risks failing to collect at all, meaning that the HOA not only loses out on the amount owed, it is also unable to charge to the owner its costs for collecting the debt. This is a major issue in fines cases, in which the association’s case is often harder to prove, especially if they have let the fine grow to an unreasonable size. Furthermore, the board–in this situation–risks an owner mutiny if it jumps into litigation against owners for the slightest offense.

Naturally–and more successfully–most associations find a balance somewhere in the middle. When assessments go unpaid, they pursue that money to the greatest extent they can, including filing suit and ending up in court if need be. The legal case is typically straightforward and so boards, with good reason, consider chasing assessments a key part of their fiduciary duty to the association. Things are a bit trickier with fines, because of their greater uncertainty of collection. Boards must determine which cases are worth pursuing, as well as keeping in mind which cases that could get the board in trouble for selective enforcement. Consistency would be key here, but is virtually impossible. Similarly, the board must always comply with its governing documents, but the prescribed procedures typically leave little room for flexibility when practical considerations dictate a certain course of action. Clearly, consulting with the association’s attorney is a must.

In today’s economically challenging times, homeowners associations face unique challenges. When dealing with unpaid fines and assessments, it can be difficult to determine what course of action fulfills a board’s duties. More often than not, legal counsel is critical, and all boards should remember that being prepared for a situation before it happens is always the best solution.