Announcing a Special Assessment

It’s always difficult when a condominium or homeowners association must levy a special assessment against the owners. Sometimes there’s no choice.  If the association failed to reserve money for major repairs or an unexpected cost arises, a special assessment may be the only option. No owner wants to pay a special assessment.  This is why it’s important to explain to the owners why the special assessment is necessary and how it will help in the long run. Here are some tips when announcing a special assessment:

1. Send a letter to the owners explaining that the board has approved a special assessment.  (Some association governing documents may require a vote of the owners). Describe the reasons for the special assessment and be upfront about why the association doesn’t have the funds on hand.  Also cite to the authority of the board to adopt and levy the assessment.

2. Discuss the alternatives that the board considered.  Alternatives include taking out a loan from a bank, postponing repairs, or selling common assets.

3. If possible, explain that owners may have options in paying the special assessment.  The association may have an arrangement with its bank to offer financing to owners.  In some cases owners may have insurance coverage for special assessments.

4. Be sympathetic and if necessary, express regret.  Board members are also owners—it makes sense that board members may not be enthusiastic about the assessment, yet recognize it is in the best interests of the entire membership and association.

5. Give as many details on the total assessment amount, as well as each owner’s share of the assessment.  Be clear with deadlines for payment and payment options which may be available to the owners.

6. Ideally, divide the special assessment into 12 equal payments for owners, each with monthly due dates.  In the case of a foreclosure or bankruptcy, it may be possible to recover unpaid special assessments.

As always, seek qualified legal counsel before levying or collecting a special assessment.

Tips for Collections Policies

The authority to levy and collect assessments is found in the Declaration/CC&Rs of community associations.  However, there aren’t typically specific procedures to follow if an owner is delinquent in the payment of assessments.  Most condominium and homeowner associations adopt a separate resolution or policy which governs how the association will handle collecting from delinquent owners.  Here are a few things to consider when adopting a collections policy:

1. State the authority for collecting assessments

The policy should begin by citing to the appropriate authority to file liens, charge late fees and interest, and turn the account over to an attorney for collections.  The governing documents will contain the obligation for all owners to pay regular assessments.  The authority to charge late fees or interest (sometimes the amount is left open for the board to decide) will also be in the association’s governing documents.  In addition, cite to the appropriate state law which grants community associations the power to collect assessments, fines, late fees or interest.

2. Define the process

Most collections policies include the following steps:

a. Initial letter indicating delinquency and the amount of any late fees or interest

After 30 days from the due date, the Association will provide notice to the delinquent owner stating that a late fee and interest have accrued. The notice shall state that if the balance is not paid, the account will be turned over to a law firm for collections.

Any assessment which becomes delinquent will be charged a late fee in an amount equal to 5% of the unpaid assessment. In addition, the assessment will accrue interest at the rate of 9%.

b. Lien filed on lot or unit

c. Second demand letter stating that the file will be turned over for collections

Any assessment including late fees unpaid and past due for more than 60 days will be referred by the Board of Directors to its law firm  for collection.

d. Provisions to comply with the Federal Fair Debt Collections Practices Act

e. The type of garnishment tools which will be used once a judgment is entered against the owner.

After CALAW obtains a judgment, it will begin collection of the judgment by:

garnishing the owner's bank account; or

garnishing the owner's wages; or

executing a writ against the owner's real or personal property; or

any additional methods authorized by law.

3. Publicize the policy

The association will have a difficult time enforcing its policies if those policies aren’t publicized and distributed to owners. This puts owners on notice of the steps that will be followed for the collection of delinquent assessments.  Keep in mind that when new owners move to the community, copies of all resolutions, policies or other unrecorded documents need to be provided.

4. Enforce the policy consistently

Once the board of director adopts a collections policy it must follow the steps outlined in each and every circumstances.  Special arrangements or exceptions are not appropriate. The exact same procedures must be followed in each case.  If not, owners may challenge the application and enforcement as selective or unfair.

Collecting on Judgments

Sometimes owners in a community don’t pay their assessments. Often, the Board of Directors must file a lawsuit to collect the delinquent assessments. The lawsuit is filed in small claims court or the civil court in the county where the property is located. Typically, owners do not respond to the lawsuit and the Association receives a “default judgment.” But a judgment is only as good as the Association’s ability to collect the judgment.  For a more detailed overview of collections, click here. Once a judgment is secured, there are several avenues the Association may pursue. Here are some of those options:

1. Garnish Wages or Bank Accounts

At anytime after the judgment is entered in the court records, the Association’s attorney may issue garnishments. Items that are subject to garnishment include: bank accounts, wages, certain personal property, rental income or income tax returns.

The “writ of garnishment” is sent to the individual or entity that holds an interest in the owner’s assets or property.  For example, writs are sent to banks where the owner has an account or to the owner’s employer.

There are some assets or income that are exempt from garnishment, such as social security or disability income.  In those cases, the owner may challenge the garnishment and a judge will then determine what is exempt and what is subject to the garnishment.

2. Debtor Examinations

Once the judgment has been entered in the court records, the Association may obtain an order requiring the owner to appear at the court house.  On the stated day and time, the Association’s attorney may ask questions of the owner related to their finances, bank accounts, assets, or any other information relevant to collecting the judgment.  The information gathered from the debtor exam is then used to issue garnishments or take other collection action to pay off the judgment.

3. Execution on Vehicles

In some cases, a delinquent owner may own cars, boats or other vehicles that are owned free and clear.  In those circumstances, the property may be taken by the sheriff, sold at auction, and the amount received is credited toward the Association’s judgment amount. The Association’s attorney can determine if such assets are available.

4. Settlement

The threat of garnishment may be enough to cause the owner to voluntarily pay the amount of the judgment or make regular payments until the judgment is satisfied.  In those cases, the Association may want to enter into a formal settlement agreement which includes all of the costs and fees that were incurred after the judgment was entered.  This avoids having to file a “supplemental” judgment to collect those fees and costs.

Overview of Collections and Foreclosures

Every homeowners and condominium association relies on assessments in order to operate. Assessments pay for insurance, maintenance, management, and other services necessary for an association to run properly. When owners don’t pay their assessments, the board has a duty to pursue collection efforts. There are two separate avenues for collecting delinquent assessments: 1) foreclosure of the association’s lien; and 2) a personal judgment against the owner for the amount of the assessments.

Liens

Most governing documents provide for an automatic (by operation of law) lien placed on the owner’s property the moment the assessment is delinquent.  State law in some jurisdictions may also provide for an automatic lien.  For planned communities in Oregon the statute reads:

(1) Whenever a homeowners association levies any assessment against a lot, the association shall have a lien upon the individual lot for any unpaid assessments. The lien includes interest, late charges, attorney fees, costs or other amounts imposed under the declaration or bylaws or other recorded governing document. (ORS 94.709)

Oregon condominiums have a similar statute:

(1) Whenever an association of unit owners levies any assessment against a unit, the association of unit owners shall have a lien upon the individual unit and the undivided interest in the common elements appertaining to such unit for any unpaid assessments. (ORS 100.450)

And lastly, Washington’s automatic lien statute for condominiums states:

(1) The association has a lien on a unit for any unpaid assessments levied against a unit from the time the assessment is due. (RCW 64.34.364)

However, it’s a good policy to always record a formal paper lien. The lien is always filed in the recorder’s office of the county where the property is located.

Typically, association liens are superior to all other liens except for first mortgages and deeds of trust, and tax liens. This means that if the association decides to foreclose its assessment lien, it does so subject to any first mortgages or tax liens.  If there is little equity in the owner’s property, then foreclosing the association’s lien may not be the best choice.

Personal Judgments

Aside from the association’s lien rights, the delinquent owner remains personally liable for the assessments.  (ORS 100.475, 64.34.364( 8)) Even if the owner sells the property in your community and moves elsewhere, their personal obligation to pay the balance remains.  This is true even if the property was foreclosed.

To secure a personal judgment, a lawsuit must be filed.  The lawsuit must be personally served on the owner, and the owner has an opportunity to file a written response.  The written response is called an “Answer.”  For a timeline of the collections process, click here.

If the owner fails to file an Answer, the association can ask the court for a default judgment.  Once the judgment is received the association may begin collecting on the judgment through garnishment of wages or bank accounts, filing a writ for the owner’s personal property to be sold at a sheriff's auction, or other legal procedures until the judgment is paid in full.

5 Common Collections Mistakes

Assessments are critical for community associations. Regular assessments allow the association to purchase liability insurance, maintain common property, and hire professional management. When an owner in a community fails to pay their share of the assessments, the other owners make up the deficit. Every condominium and homeowners association should have a collections policy that identifies exactly how the association will handle delinquencies.

Here are five common collection mistakes that board members often make: 1. Giving Up After a Foreclosure

Each community association has two enforcement routes to collect delinquent assessments. The first is the association’s right to lien the property or unit of the delinquent owner. The second is to pursue a personal judgment against the individual. The lien right and the personal judgment right are independent of each other. So, if an owner’s home or unit is foreclosed, the association still has a legal right to pursue the delinquent owner for the entire balance due to the association.

2. Failing to Timely Pursue Debt

There is a significant psychological component to debt. The longer a creditor waits to pursue collection efforts, the less likely the creditor will get paid. Each association should have a collections policy in place that explains to each owner exactly when collection efforts will begin after an assessment becomes delinquent. For associations with monthly assessments, collection efforts should begin 15-30 days after due. Associations with quarterly assessments should begin collections prior to the next quarter’s assessment.

3. Communicating About the Debt to Third Parties

Federal law prohibits collections agencies or collections law firms from communicating about an owner’s debt to any third-party. Board members should follow that same policy and never discuss an owner’s delinquency with other owners or third-parties. Discussion of deliquencies should be done in executive session during a regular board meeting.

4. Playing Favorites

Each association has clear guidelines on the amount of assessments, the frequency, interest rate, and late charges. The board should follow those guidelines with every delinquent owner and never make special arrangements with certain owners if those same arrangements are not available to all owners. Granted, when circumstances warrant the board may compromise on the total amount of debt in order to secure a settlement agreement. Legal counsel should be consulted prior to entering into a settlement agreement with a delinquent owner.

5. Not Allocating Assessments Correctly

In most planned communities each lot owner pays an equal share of the total amount of levied assessments. Some condominium associations allocate assessments based on square footage of the unit. In any case, always read your governing documents carefully to ensure assessments are allocated in accordance with the provisions in your Declaration or Bylaws.

Effective Collections Policies

At some point every condominium or homeowners association experiences delinquencies. Assessments are critical for the association to pay insurance, maintain common property, or hire professional management. When an owner is delinquent, the association has two options. It can foreclose on the association’s lien against the lot or unit, or file a personal lawsuit against the owner.

Every association should have a collections policy which outlines the steps that will be taken when an owner is delinquent. It’s critical that the policy is followed each time an owner is delinquent, and that the same steps are used with each owner.

The policy should include the following:

1. Citations to the authority to levy and collect assessments (usually the governing documents and state statutes)

2. The amount of the late fee and when the late fee will be charged.

3. Interest rate.

4. A statement that the association may file a foreclosure action.

5. When the first demand letter will be sent.

6. When the file will be turned over to an attorney or collection agency.

7. When a lien will be filed against the property.

8. If a judgment is obtained, how the association will collect on the judgment (garnishment, writ of execution against personal property)

Click here for a sample collections policy: CALAW COLLECTIONS RESOLUTION

For more information about Community Association Law Group's collections program, click here.

Judicial Foreclosure in Oregon

Overview

Oregon is a “lien theory” state, meaning that a mortgage of real estate only creates a lien or encumbrance and does not transfer title. Foreclosure of a mortgage lien is done through a statutory foreclosure lawsuit, i.e. judicial foreclosure.

This is a different process than the foreclosure of a deed of trust through advertisement and sale, which may be done non-judicially.

ORS Chapter 88 governs the foreclosure of mortgages:

Except as otherwise provided by law, a lien upon real or personal property, other than that of a judgment, whether created by mortgage or otherwise, must be foreclosed, and the property adjudged to be sold to satisfy the debt the lien secures, by bringing suit. Except as provided in ORS 88.103 (Sale of real property after mortgage foreclosure), in addition to the judgment of foreclosure and sale, if the lien debtor or another person, as principal or otherwise, has given a promissory note or other personal obligation for the payment of the debt, the court also shall enter a judgment for the amount of the debt against the lien debtor or other person. The provisions of this chapter as to liens upon personal property do not exclude a person that has a lien from any other remedy or right that the person otherwise has with respect to the property. (ORS 88.010(1))

1. Right to Foreclose

In order for the mortgage holder to foreclose, the mortgagee must default or breach the terms of the mortgage. Typically, this occurs when the homeowner stops or fails to pay the monthly mortgage payment.

2. The Foreclosure Lawsuit

A.  Procedure

The lawsuit to foreclose is filed in the circuit court in the county where the property is located. Like any other lawsuit, the foreclosure suit must be filed with the court, and then personally served upon the defaulting mortgagee.

The mortgagee has 30 days to file an “answer” or response to the suit. If the mortgagee fails to file a response, the mortgage holder is entitled to a “default judgment”. If a response is filed by the mortgagee, a trial date will be set and the case proceeds like any other circuit court case.

B.  Parties

ORS 88.030 describes other lien holders and debtors as defendants:

Any person having a lien subsequent to the plaintiff upon the same property or any part thereof, or who has given a promissory note or other personal obligation for the payment of the debt, or any part thereof, secured by the mortgage or other lien which is the subject of the suit, shall be made a defendant in the suit, and any person having a prior lien may be made defendant at the option of the plaintiff, or by the order of the court when deemed necessary. The failure of any junior lien or interest holder who is omitted as a party defendant in the suit to redeem within five years of the date of a sheriffs sale under ORS 88.106 (Sale and redemption) shall bar such junior lien or interest holder from any other action or proceeding against the property by the person on account of such persons lien or interest. (ORS 88.030)

The foreclosure lawsuit will usually name the following as necessary parties to the litigation:

1.  Owner of the mortgaged property;

2. If the owner is deceased, the personal representative of the estate and the heirs;

3. Junior lien holders, such as second mortgagees and judgment creditors.

4. Any individuals residing at the property

 C. Defenses The mortgagee may raise several defenses to the foreclosure action. Defenses include:

1.  Fraud

2.  Failure to credit payments

3.  Statute of Limitations

4. Laches

5. Unclean Hands

3. What Gets Foreclosed?

If it’s the first mortgage on the property, nearly all interests or liens on the property recorded after the first mortgage are wiped-out through the foreclosure lawsuit. For example, suppose an owner purchases the property through a mortgage in 1999. In 2001, the owner takes out a line of credit secured by the property. If the owner defaults on the 1999 mortgage and a foreclosure suit is filed, that suit will wipe out the 2001 line of credit lien.

A. Priority of Liens

1. Tax Liens

2. Condominium Liens

Whenever an association of unit owners levies any assessment against a unit, the association of unit owners shall have a lien upon the individual unit and the undivided interest in the common elements appertaining to such unit for any unpaid assessments. The lien includes interest, late charges, attorney fees, costs or other amounts levied under the declaration or bylaws. The lien is prior to a homestead exemption and all other liens or encumbrances upon the unit except:

     (a) Tax and assessment liens; and

     (b) A first mortgage or trust deed of record[.]

    (ORS  100.450(1))

A condominium lien can become superior to a first mortgage or deed of trust if proper notice is given. See ORS 100.450(7).

4. The Sale

Before the sheriff conducts the sale of the foreclosed property, they must publish notice of the time and place of the sale once a week for four successive weeks. The notice must describe the property. The mortgagor may then file a motion for the Court to confirm the sale after 10 days from the date of the sheriff’s sale. Typically, the Court will confirm unless there is evidence of fraud, abuse, or inadequacy of price.

5. Sheriff’s Deed 

After the statutory redemption period has expired, the purchaser or last redemptioner is entitled to receive a deed of conveyance from the sheriff.

6. Redemption

Up until the time of the actual foreclosure sale, the mortgagee may pay the amount of the debt and “redeem” his or her right in the property. This dismisses the foreclosure suit. Even after the sale, the debtor has another chance at redemption by paying the purchase price (plus taxes and other fees) within 180 days after the date of the sale.

If the rights of all persons entitled to redeem are acquired by the purchaser or a redemptioner before the statutory redemption period expires, then the court may direct the sheriff to make an immediate conveyance to that person, without requiring him or her to wait for the redemption period to expire.

Click here for a judicial foreclosure timeline chart: Oregon - Judicial Foreclosure