How to handle Community Association Collections in the aftermath of COVID-19
On March 10, 2020, Governor Gretchen Whitmer signed Executive Order 2020-4 and declared a State of Emergency in the State of Michigan related to the novel respiratory disease coronavirus (COVID-19). On March 13, President Donald Trump declared a National Emergency. On March 23, 2020, Governor Whitmer signed Executive Order 2020-21 (COVID-19) which imposed a temporary stay-at-home requirement, subject to certain exceptions. Executive Order 2020-21 (COVID-19) will have a significant impact on the Michigan economy as it limits the types of employees who can go to work until at least April 14, 2020. Unsurprisingly, unemployment claims in Michigan increased 2100% with 108,710 new claims reported in the week before Executive Order 2020-21 (COVID-19) was enacted.
Given the expected economic downturn, Michigan condominium and homeowners associations should anticipate a rise in delinquencies in the near future. Many community association boards will be faced with difficult decisions in the coming months. In addition to hindering an association’s ability to meet its operating expenses, a high delinquency rate may also disqualify a community association from obtaining a bank loan or it may impact the ability of a potential purchaser to obtain a mortgage to purchase property in the community. Accordingly, it is important that community associations maintain a low delinquency rate.
However, community association board members should try and be sensitive to the fact that many people unexpectedly lost their jobs or have suffered a reduction of income as a result of the coronavirus pandemic. Accordingly, while the board of directors has a fiduciary obligation to collect assessments, there are strategies that a community association board may be able to employ to be more flexible in the wake of the coronavirus epidemic. Prior to implementing any of the below strategies, we encourage the board of directors to contact their attorney to ensure that the below options are financially feasible and allowed by the governing documents.
1. Increase Communication and offer support.
Given that an economic downturn is inevitable, we recommend that community associations send out a notice to the homeowners requesting that they immediately contact the association if they are unable to pay assessments. A homeowners association that knows the scope of their potential delinquency issues early on may be able to adjust their budget for the remainder of the year. Similarly, a community association may be able to recommend a program that provides governmental assistance and results in a win-win situation for the community association and the homeowner. The Michigan Step Forward program provides financial assistance to help with the payment of condominium and homeowners association assessments for those that qualify.
2. Implement or Amend a Collection Policy.
All community associations should have a collection policy to ensure efficient collection of delinquent assessments and that all homeowners are treated equally. A typical collection policy will identify the following:
- The due date of the assessment and the date that interest or late fees begin to accrue.
- A time period in which the board or management company will send a follow up letter for any missed payments.
- A time period for turning over delinquent assessments to legal counsel.
- Whether legal counsel will send an additional demand letter or letters to a delinquent owner.
- Whether assessments will be accelerated, if permitted by the governing documents.
- Whether a rent diversion letter will be sent to the tenant of a condominium unit that is rented as permitted by MCL 559.212.
- How payments will be applied and ensuring that they are applied in a manner that is consistent with the governing documents.
- A time period in which a lien will be placed on the property.
- A time period in which foreclosure will be commenced and/or a complaint will be filed in court.
If a community association has an existing collection policy, we recommend that the timelines and collections procedures be reviewed by the board of directors. By way of example, after a lien is placed on a unit, the board of directors may want to amend the policy to delay foreclosures until increased economic activity resumes and to account for government closures.
Most collection policies will also provide discretion to the board of directors to enter into payment plans. In exercising this discretion, the board should ensure that a delinquent homeowner provides evidence that they are suffering from a financial hardship. If a condominium or homeowners association takes an inflexible position from the outset, such action may force the owner to declare bankruptcy, which can complicate matters. However, accepting a payment plan does not mean that a community association should accept less than the total amount of assessments owed. While providing a “discount” may seem like a neighborly thing to do, in reality, it only shifts the financial burden onto the other homeowners.
3. Waive Interest and Late Fees.
In most cases, interest and late fees are merely an incentive to make timely payments as these charges are not typically included as projected income in a community association’s budget. Accordingly, community associations should consider waiving interest and late fees to help collect delinquent assessments. However, we do NOT encourage condominium and homeowners associations to waive attorney’s fees and costs. MCL 559.206 permits a Michigan condominium association to recover reasonable attorney’s fees and costs that are incurred because of an alleged default by a co-owner if permitted by the Master Deed and Condominium Bylaws. Similarly, the governing documents for a homeowners association typically permit the recovery of attorney’s fees and costs. Given that attorney’s fees and costs are an unplanned expense, we do not recommend that they be waived as this creates an additional financial burden on the other homeowners.
4. Continue to record Liens.
MCL 559.208(1) of the Michigan Condominium Act provides in pertinent part:
(1) Sums assessed to a co-owner by the association of co-owners that are unpaid together with interest on such sums, collection and late charges, advances made by the association of co-owners for taxes or other liens to protect its lien, attorney fees, and fines in accordance with the condominium documents, constitute a lien upon the unit or units in the project owned by the co-owner at the time of the assessment before other liens except tax liens on the condominium unit in favor of any state or federal taxing authority and sums unpaid on a first mortgage of record, except that past due assessments that are evidenced by a notice of lien recorded as set forth in subsection (3) have priority over a first mortgage recorded subsequent to the recording of the notice of lien. The lien upon each condominium unit owned by the co-owner shall be in the amount assessed against the condominium unit, plus a proportionate share of the total of all other unpaid assessments attributable to condominium units no longer owned by the co-owner but which became due while the co-owner had title to the condominium units. The lien may be foreclosed by an action or by advertisement by the association of co-owners in the name of the condominium project on behalf of the other co-owners.
Accordingly, a condominium lien has priority over all other liens, with the exception of a first mortgage of record or tax lien. However, pursuant to MCL 559.208, a condominium lien has priority over a first mortgage of record if it was recorded before the first mortgage was recorded. Similarly, the Eastern District of Michigan has held that notwithstanding the language of MCL 559.208, that a prior recorded condominium lien has priority over a federal tax lien, but only to the extent of the amount stated in the lien notice, pursuant to 26 U.S.C. 6323. If a unit is sold, and a first mortgage is recorded, or a federal tax lien is recorded before the filing of the condominium lien, a condominium association could lose priority. Accordingly, it is important for condominium associations to continue to record liens to protect their interests.
Similarly, if an owner declares bankruptcy, a community association must record a lien to proceed “in rem”, i.e. against the property. The Sixth Circuit Court of Appeals has held that even if a debt is discharged in bankruptcy, that a condominium association could still proceed “in rem.” Specifically,
The discharge of personal obligations through a Chapter 7 discharge does not terminate a secured creditor’s in rem rights unless the creditor’s lien was avoided during the bankruptcy. Carlton House’s Ohio statutory lien continued post-discharge. Thus, while Carlton House was not entitled to proceed in personam against Jackson for discharged pre-petition debts, it could proceed in rem against the Condominium for all sums secured by the lien, both prepetition and post-petition.
In re Jackson, 63 Bankr Ct Dec 47; 554 BR 156, 165 (2016). Accordingly, community associations should still record liens to protect their interests in the event that a homeowner declares bankruptcy.
5. Delay Foreclosure for a Reasonable Period of Time.
After a lien is recorded, a community association has more flexibility in determining whether to immediately proceed to foreclosure or to provide additional time for payment. While community associations are not subject to the government mandated foreclosure moratorium imposed by HUD and the FHFA, it will be difficult to proceed with a foreclosure sale in the near future as many counties have stopped sales and courts are only providing limited services during the coronavirus pandemic. Accordingly, community associations should work with homeowners to work out payment plans to the extent possible.
If a co-owner does not work out a payment plan after a lien is recorded, MCL 559.208 provides the following remedies for condominium associations:
(2) A foreclosure shall be in the same manner as a foreclosure under the laws relating to foreclosure of real estate mortgages by advertisement or judicial action except that to the extent the condominium documents provide, the association of co-owners is entitled to reasonable interest, expenses, costs, and attorney fees for foreclosure by advertisement or judicial action. The redemption period for a foreclosure is 6 months from the date of sale unless the property is abandoned, in which event the redemption period is 1 month from the date of sale.
(4) The association of co-owners, acting on behalf of all co-owners, unless prohibited by the master deed or bylaws, may bid in at the foreclosure sale, and acquire, hold, lease, mortgage, or convey the condominium unit.
(5) An action to recover money judgments for unpaid assessments may be maintained without foreclosing or waiving the lien.
(6) An action for money damages and foreclosure may be combined in 1 action.
(8) The co-owner of a condominium unit subject to foreclosure under this section, and any purchaser, grantee, successor, or assignee of the co-owner’s interest in the condominium unit, is liable for assessments by the association of co-owners chargeable to the condominium unit that become due before expiration of the period of redemption together with interest, advances made by the association of co-owners for taxes or other liens to protect its lien, costs, and attorney fees incurred in their collection.
Accordingly, a condominium association has the option of pursuing non-judicial foreclosure, judicial foreclosure or a money judgment for the unpaid assessments. Whether to proceed with foreclosure or a money judgment will depend on a variety of factors such as collectability, lien priority and the amount of equity in the unit. Finally, a condominium association should be careful about taking a deed in lieu of foreclosure as it may eliminate their lien priority. In contrast, a homeowners association does not have a statutory lien as Michigan does not have a homeowners association act. Rather, the ability of a homeowners association to place and foreclose on a lien is determined by the language of the governing documents.
The state of emergency caused by the coronavirus pandemic has created a challenging situation for everyone. Community associations will need to adapt their policies and procedures in order to continue operations while dealing with the realities of the current economic environment. Accordingly, being proactive and contacting the association’s legal counsel to setup a plan to deal with an anticipated increase in delinquencies should be a top priority for community associations.
Kevin Hirzel is the Managing Member of Hirzel Law, PLC and concentrates his practice on commercial litigation, community association law, condominium law, Fair Housing Act compliance, homeowners association and real estate law. Mr. Hirzel is a fellow in the Community Associations Institute’s College of Community Association Lawyers, a prestigious designation given to less than 175 attorneys in the country. He has been a Michigan Super Lawyer’s Rising Star in Real Estate Law from 2013-2019, an award given to only 2.5% of the attorneys in Michigan each year. Mr. Hirzel has been named a Leading Lawyer in Condominium & HOA law by Leading Lawyers Magazine in 2018 and 2019, an award given to less than 5% of the attorneys in Michigan each year. He represents community associations, condominium associations, cooperatives, homeowners associations, property owners and property managers throughout Michigan from Hirzel Law, PLC’s offices in Farmington and Traverse City. He may be reached at (248) 478-1800 or email@example.com.