April 17, 2009

Dealing with Delinquent Owners

The recent drumbeat from the media regarding the economy is steady and depressing. Housing construction nationwide plunged to its second-lowest level on record last month. Foreclosure filings in King, Pierce, and Snohomish counties last month were up 25 percent from February and 111 percent from March 2008. The unemployment rate in Washington has risen over the last three months at the fastest rate on record and is currently 9.2%. As a result of the deteriorating economic climate, most condominium and homeowners associations either have a significant delinquency problem or soon will. How should they respond?

Many board members are understandably reluctant to refer one of their neighbors to a collection attorney. They justify inaction by focusing on the owner’s personal misfortunes. The feelings of compassion and community at the root of that reaction are commendable, but they should not be allowed to dominate the board’s decision-making process. Board members must also consider the impact of delinquencies on the other owners and the association as a whole.

The board of directors of a condominium or homeowners association has a legal obligation to exercise reasonable business judgment and act in the best interest of the entire community. The community needs money to maintain and repair the common areas and to ensure that essential services are provided. If an owner is not paying the ongoing assessments, the board should seriously consider taking prompt legal action to attempt to collect the debt. Failing to do so within the first several months of the delinquency substantially reduces the likelihood of recovering the full amount owing, increases the likelihood that the other owners will eventually be forced to pay more, and leaves the board vulnerable to being sued by one or more owners for breach of its duties.

The board should address delinquencies with a mixture of compassion and firmness. The board should attempt to work out a payment arrangement with a delinquent owner before referring the matter to an attorney, and in these difficult times it should consider approving payment plans that are longer than those that have been approved in the past. However, boards need to be prepared to take decisive action to deal with owners that either can not or will not work with them to address their delinquencies. Adopting a uniform collection policy and sticking to it is one way to ensure that the association does not suffer its own financial crisis.