Condominium associations are nonprofit corporations that are funded solely by the assessments paid by the membership of co-owners. Unfortunately, when one co-owner fails to pay, the rest of the community must make up the difference. As a matter of fairness, co-owners who pay on time should not have to carry the cost of a neighbor’s default.
As boards of directors finalize next year’s budgets, many are asking the same question: is our collection policy ready for the new year’s assessments? A collection policy is ready if it was adopted by board resolution, reviewed by counsel to confirm that it aligns with the governing documents , and is enforced the same way for every co-owner.
This article explains why the end of the year is the right time to review a collection policy, what the policy should include, and what happens once a delinquent account is referred to the association’s attorney. Specifically, the article addresses the following topics:
- Adopting a collection policy before the new year
- The board’s fiduciary duty to collect assessments
- Why consistent enforcement protects every co-owner
- Collection tools under the Michigan Condominium Act
- What a collection policy should include
- Payment plans and the role of legal counsel
- Recovering attorney fees and costs
Adopting a Collection Policy Before the New Year
Most boards of directors adopt the coming year’s budget in the fall, which makes it the ideal time to adopt or update the association’s collection policy as well. A collection policy that is in place before January 1 will govern every delinquency in the new year in the same manner, beginning with the first late payment.
In contrast, a board that waits until March to adopt a policy, after several co-owners have already fallen behind, invites disputes over which rules apply to which accounts. It is also important to remember that the longer an account remains unpaid, the more difficult it becomes to collect.
The Board’s Fiduciary Duty to Collect Assessments
Under MCL 559.169, every co-owner must contribute to the association’s common expenses and cannot avoid paying by not using the common elements or by abandoning the unit. The board of directors, in turn, has a fiduciary duty to act in the best interests of the association. In Michigan, MCL 450.2541 requires directors to act in good faith, with the care an ordinarily prudent person would exercise in a similar position, and in a manner they reasonably believe is in the best interests of the corporation. Collecting delinquent assessments is part of that duty.
Boards cannot ignore delinquencies. Without a steady source of income, an association may be forced to defer necessary maintenance to roofs, siding, and other common elements. Similarly, co-owners who know the consequences of nonpayment in advance are far more likely to pay on time.
Why Consistent Enforcement Protects Every Co-owner
A collection policy only protects the association if it is followed every time. If the board skips steps or gives certain co-owners a break, a delinquent co-owner may argue selective enforcement, meaning that the association treated them differently than others in the same situation. That argument can delay collection and increase legal fees.
The same rules must apply to board members. A director who falls behind on assessments should be referred to counsel on the same schedule as any other co-owner.
Consistent enforcement also protects every co-owner’s ability to sell or refinance. Lenders that sell loans to Fannie Mae or Freddie Mac generally will not lend in a condominium where more than 15% of the units are 60 or more days delinquent on assessments. In a 100-unit condominium, that is only 16 units, which is why applying the collection policy consistently is so important.
Collection Tools Under the Michigan Condominium Act
The Michigan Condominium Act provides condominium associations with several tools to collect delinquent assessments, including the following:
- Assessment Lien. Under MCL 559.208, unpaid assessments, together with interest, late charges, costs, attorney fees, and fines permitted by the condominium documents, constitute a lien on the unit.
- The association may foreclose its lien either by judicial action or by advertisement, which is an out-of-court process.
- Rent Diversion. Under MCL 559.212, if a delinquent co-owner leases the unit, the association may provide the required notices and collect the rent directly from the tenant.
These tools come with rules. Collection procedures must comply with Michigan debt collection laws and, once an account is turned over to an attorney or collection agency, the federal Fair Debt Collection Practices Act. Similarly, if a co-owner files bankruptcy, collection activity generally must stop while the case is pending.
What a Collection Policy Should Include: A Checklist for the Treasurer
Every provision in a collection policy must be authorized by the association’s governing documents, which include the master deed, bylaws, and articles of incorporation. The policy cannot conflict with those documents, and if the governing documents do not grant the board a particular power, a collection policy cannot create it. As such, the association’s attorney should review the policy against the governing documents before the board adopts it.
The treasurer can use the following checklist to confirm that the collection policy addresses each item, and then provide it to the property manager as a reference:
☐ Authority. The policy identifies the statute and the provisions of the governing documents that authorize the board to adopt it, and states that it replaces any prior collection policy.
☐ Due Date, Late Fee, and Interest. The policy sets a firm due date, typically the first day of the month, and charges late fees and interest only in the amounts and at the rates the bylaws authorize.
☐ Collection Procedures. The policy sets out the steps the property manager will follow once a payment is late. For example, the manager may send a reminder letter at 30 days and a second letter at 60 days advising the co-owner that the account will be referred to counsel. Once an account reaches a set age or amount, it is referred to the association’s attorney automatically, without a separate board vote. Dividing these responsibilities among the manager, the treasurer, and the attorney also provides checks and balances.
☐ Liens and Acceleration. The policy authorizes the board to record a lien immediately if it learns of a pending sale, a mortgage foreclosure, or a co-owner’s death or incapacity. If the governing documents allow it, the policy may also accelerate the remaining installments of the annual assessment once an account is referred.
☐ Payment Plans. Payment plans are in writing and include a default clause that terminates the plan if a payment is missed. The lien remains in place, and accepting payments does not waive any of the association’s rights.
☐ Legal Fees and Costs. Collection costs and attorney fees are charged to the delinquent co-owner’s account, and the policy states when fees begin to accrue and the order in which payments will be applied. For more information, see When Can a Michigan Condominium Association Charge Costs Back to a Co-Owner?
☐ Partial Payments and Non-Waiver. The policy states whether partial payments will be accepted and confirms that missing a deadline in the policy does not waive the association’s right to enforce it.
☐ Restrictions on Delinquent Co-owners. The policy includes any restrictions the governing documents permit while an account is in default, such as restrictions on voting or using the common elements, imposed only after any notice and hearing the documents require.
☐ Uniform Enforcement. The policy applies the same way to every co-owner, with no exceptions for friends, long-time residents, or board members.
☐ Adoption. The policy is adopted by board resolution after review by counsel and is distributed to every co-owner.
Payment Plans and the Role of Legal Counsel
Payment plans are often appropriate for first-time delinquencies and co-owners with a legitimate financial hardship. A reasonable payment plan usually results in cooperation, while an inflexible approach from the outset may force a co-owner into mortgage default or bankruptcy, which makes collection more difficult. However, accepting a payment plan does not mean that the association should accept less than the total amount due, including all fees and costs.
Once an account is referred, the association’s attorney will evaluate the co-owner’s situation and advise the board on the best course of action. There are two basic paths to recovery. The association may sue the co-owner for a money judgment based on the co-owner’s personal obligation to pay, or it may rely on its lien, which runs with the unit regardless of who owns it.
Using the lien, the association may wait to be paid when the unit is sold or foreclose if there is equity in the unit. If the unit is underwater, the association may foreclose and lease the unit until the mortgage lender forecloses. Our article Foreclosure or Money Judgment? explains how to choose between these options.
Recording a notice of lien is typically one of the attorney’s first steps after referral. A recorded lien makes the delinquent assessments a matter of public record and puts buyers, title companies, mortgage lenders, and bankruptcy trustees on notice of the association’s interest. By waiting too long to turn over an account, an association may lose out if a mortgage foreclosure is filed or the co-owner files bankruptcy.
To act quickly, the attorney needs a complete file, including the account ledger, all known addresses and phone numbers, the names of any tenants, and copies of returned checks. The board should also keep the property manager informed of its decisions.
Recovering Attorney Fees and Costs
Under MCL 559.206, an association that is successful in a proceeding against a defaulting co-owner may recover its costs and reasonable attorney fees, as determined by the court, to the extent the condominium documents expressly provide for them. Courts often determine what is reasonable by looking at local rates, including the State Bar of Michigan’s Economics of Law Practice survey.
It is also important to note that some bankruptcy courts have refused to allow associations to pass along a collection company’s contingency fees, because the association never actually incurred those fees. As such, boards should confirm at the outset that their collection fees will be recoverable.
Key Takeaways for Condominium Boards
A new budget year is a reminder that the way an association collects assessments affects its finances, its fairness to co-owners, and its marketability. Condominium associations should be proactive, rather than waiting until accounts are months behind or a buyer’s loan is delayed. Accordingly, boards should consider the following:
- Adopt the Policy Before January 1. Boards should adopt or update the collection policy while approving the budget, so the same rules apply to every delinquency in the new year.
- Have Counsel Review the Policy. The association’s attorney should confirm that the governing documents authorize every fee, interest rate, deadline, and restriction in the policy, and that nothing conflicts with them. The policy should then be adopted by board resolution and distributed to every co-owner.
- Establish Written Procedures. The policy should set out each step the property manager will take once a payment is late and when an account will be referred to counsel, and the board should review receivables regularly.
- Put Payment Plans in Writing. Every payment plan should include a default clause, keep the lien in place, and require payment of the full balance, including fees and costs.
- Confirm Fee Recovery. Boards should confirm that the condominium documents expressly allow the association to recover attorney fees and costs from delinquent co-owners.
- Enforce Consistently. The policy should be applied the same way to every co-owner, including board members, to avoid claims of selective enforcement and to keep delinquencies below the 15% level that can prevent buyers from obtaining conventional financing.
Boards should not wait until a delinquency becomes a crisis to discover that their collection policy has gaps. A collection policy adopted before the new year, reviewed by counsel, and enforced consistently gives the association the best chance of collecting what it is owed.
