By and large, a board and management company can expect payment from residents for monthly fees to be received on time and in full. These all-important funds keep day-to-day operations moving forward without hiccups. There are situations, however, that arise which can offset the balance sheet. Circumstances run the gamut but in the end, monies that can’t be collected end up costing a whole lot more than the losses they represent.
“The most common excuse given is that the person simply can’t afford to make the payment whether it is true or not,” says attorney Ronald Steinvurzel, a member of the New Jersey Bar and principal of the Steinvurzel Law Group, P.C., based in White Plains. “These people will ask for patience and will offer the excuse du jour which most recently has been the economy.”
It is true that the economy has played a major role in not only late payments but the ability for some people to make their payments at all. This is due, in part, to high jobless rates. For example, according to the New Jersey Department of Labor, the Garden State’s unemployment rate is 9.0 percent, as of February 2012, compared to a national rate which is 8.3 percent.
“In many cases, boards and management companies hear excuses that the resident is owed money or lost their job, as of late the economy is the excuse, and what a great excuse because everyone knows it to be true but that does make the situation any better,” says Steinvurzel.
The way in which a board determines how to handle collecting monies that are past due is always different as respective bylaws dictate the course of action. In most situations there is a grace period between five and 15 days after the payment is due, which is usually the first of the month. “If it is deemed a temporary issue, then it is simply a matter of collecting the money,” says Michael A. Esposito, CPA, audit partner at New York-based Kleiman & Weinshank, LLP., and a member of the New Jersey State Society of Certified Public Accountants, “If it’s a chronic use, you have to then factor the losses into your budgeting.”
To this end, most boards will assume that there will be a percentage, albeit small, of delinquencies impacting the rest of the community. This is considered an unfair charge to residents that faithfully pay their common fees and dues. “If, for example, you were trying to collect one million dollars, you have to figure that you will not collect that amount and will collect something less,” says Esposito. “Theoretically, you’re still going to have to come up with that $1 million dollars so common charges for all residents have to be raised to say $1.1 million dollars. This is the downside of living cooperatively.”
Mediation Before Litigation
While most boards have an attorney on retainer, they depend on their management company to keep them apprised of any delinquencies. This communication chain of command can add more time to the situation. For example, if a resident misses a payment, the management company will normally not send a notice to that resident until the grace period is over, and in some cases will wait weeks longer. The management company will inform the board at the next monthly meeting. So before any action can be considered, and providing the resident didn’t make good on the first missed payment, the delinquent resident will likely have missed two payments before any serious action is taken.
“Common problems are people losing their jobs or claiming bankruptcy and the management company are the ones that have to be aware of the reason that payments are not being made,” says Albert M. Kushnirov, CPA and president of Greenberg & Brennan, CPAs, P.C., an accounting practice specializing in cooperatives and condominiums, “We are seeing more of this in the last couple of years. And when it comes with how a board will deal with the situation, everyone is different. It is like every board is a different country with different rules and customs.”
In Kushnirov’s experience, collecting arrears is difficult. “It is very rare that a payment plan is set up but I can recall a few instances where a shareholder or homeowner did pay in installments,” he says. “The collections process is a very long road.”
Depending on the board, the rules for collection of delinquent fees are usually covered in the bylaws or “house rules,” the propriety lease, the offering plan, or management policy. Boards generally prefer that if a written notice doesn’t spur activity to have the management company call the resident directly. “Typically, this type of follow-up will continue for a month or two.”
Suspending Parking and Other Privileges
If legal action is taken, it can take months if not over a year for a case to be settled. During this time period, the resident in question can be subjected to restrictions such as removal of parking privileges or the use of common areas or recreational areas. This, however, might be hard to enforce and requires additional oversight and expense in the way of staff that may not be available.
“Dealing with delinquent unit owners can be a time-consuming and costly endeavor for an association board,” says attorney Ronald L. Perl of the Princeton-based law firm Hill Wallack, LLP. “However, it is a board’s duty to ensure that members comply with their financial obligations to the association. As such, a board’s ultimate goal must be to ensure that each unit has an owner who fulfills his or her financial obligations and complies with the association’s governing documents.”
Several steps can be tried to get the unit owner to pay including suspending privileges and taking away amenities such as parking. Some states, like Florida, for instance, have provisions codified into law allowing homeowner associations to suspend common area privileges.
In New Jersey, Perl points to a legal decision supporting a New Jersey condominium association that suspended an owner’s parking privileges for non-payment of association fees.
In the decision handed down in 2011, Perl says the Appellate Division of New Jersey Superior Court affirmed a decision of the New Jersey Division of Civil Rights, which found that the Victoriana Condominium Association did not act in a discriminatory manner when it suspended the parking privileges of a disabled unit owner for non-payment of association fees. “The decision in Shearn v. Victoriana Condominium Association, an unpublished opinion decided on November 23, 2011, found that the association had suspended Shearn’s parking privileges in connection with his repeated failure to pay condominium assessments. The court determined that the suspension of privileges was a remedy authorized by the association’s governing documents and had been applied in a non-discriminatory basis, irrespective of Shearn’s disability,” explained Perl.
In fact, says Perl, Shearn had not requested a disability accommodation until after his privileges were suspended, and he was granted an accommodation after presenting the association with adequate medical documentation concerning his disability. In this case, he continues, both the administrative agency and appellate court found that the delinquent owner’s demand for a parking accommodation was unreasonable under the circumstances.
If the board’s measures don’t yield an immediate response, an attorney is usually contacted to draft a letter with the threat of legal action citing relevant provisions of obligations in the controlling documents, says Steinvurzel.
While banks and lending institutions penalize a person for being late on a car loan payment or credit card payment with a late charge, boards often do not. Their main goal is trying to recover monies lost, and up and until legal counsel is brought into the picture, they look to remedy the situation with as little cost as possible.
“Boards do not have a lot of extra money and they do not want to spend money on attorney unless they have to,” says Steinvurzel. “If a resident is $1,500 or $3,000 behind, boards are not going to be so inclined to spend hundreds of dollars on a lawyer to try and collect it. It is more likely they will wait until that tenant or condo owner become so delinquent—several months—that the amount of money in controversy is more relevant for purposes of a legal dispute.”
During this time period, a board that is experiencing a shortfall of funds maybe be forced to conduct a special assessment to make ends meet, especially in this economic climate explains Kushnirov. “During debt collection proceedings, a few times we have seen condominiums activate a special assessment to make up for the monies lost.” While this decision is made usually in conference with the management company, Kushnirov said he offers support in the event they are “ready to move forward.”
Ultimately, the old adage of a few bad apples upsetting the apple cart is realized. Residents are not without recourse in that they can request information from the board as to who is not making payments. They are not allowed to harass the delinquent party by due to governing laws; they are entitled to know why a special assessment was executed and why their monthly dues increased.
Fair Debt Collection
The nation’s consumer protection agency, the Federal Trade Commission (FTC), is the entity that enforces the Fair Debt Collection Practices Act (FDCPA). This prohibits debt collectors from using abusive, unfair, or deceptive practices to collect from a delinquent party. Under the FDCPA, a debt collector is defined as a person who regularly collects debts owed to others and includes collection agencies, lawyers who collect debts on a regular basis, and companies that buy delinquent debts and then try to collect them, notes the FTA. “What this has done is codified moral and ethical means of the collection of debts,” says Steinvurzel. “This has created a heightened awareness for collections and this applies for condo owners in the tri-state area, too.”
In many cases, the location of the building and the demographics that comprise the residents make a difference on the frequency of payment arrears or the juxtaposed value in the event collections occur. “We deal with a lot of high-end buildings so there is a lot of equity in these apartments. If you go to the outer boroughs or suburbs where people have eighty to ninety percent mortgages, there is no money in that apartment or property,” says Esposito.
Since condominium owners and co-op owners have a different ownership structure, in many cases, Kushnirov explains that the former will continue to pay their mortgage payments but lapse on their monthly fees. “To avoid getting in trouble with the bank, condo owners will continue to pay them but not their monthly fees. This happens on a regular basis.”
Steinvurzel adds, “A co-op owner is really just a lessee with ownership of shares in a corporation. The board can initiate an eviction proceeding. It is a landlord/tenant relationship. This can easily take three to six months,” he continues. “With condominium owners, it becomes an issue of foreclosure on that unit by the board. This proceeding is far more time costly and time consuming with a six to 18 month window depending on the site, the judge and the parties involved.”
W.B. King is a freelance writer and a frequent contributor to The New Jersey Cooperator.