Two new laws will have a big effect on homeowners associations (HOAs) in Colorado. This week’s article discusses the first of these laws pertaining to HOA collections, and my next article, in two weeks, will discuss the second law pertaining to HOA manager licensing.
The term “assessments” refers to payments that owners are required to make to their HOAs for owning a unit. Assessments include regular dues as well as fines, charges for collection and “special assessments” for irregular expenses. When it comes to collecting delinquent assessments, HOAs have two formal collection options (which may be pursued simultaneously): they can pursue a judgment against a owner personally or they can foreclose a “lien” against the owner’s unit. Complex factors affect whether either of these options will lead to a successful collection.
HOAs have long been required to have a written policy concerning collection of delinquent assessments. Until the new law, HOAs were free to craft their policies however they wished and it was unclear whether following policies was mandatory. A typical policy would contemplate sending one or more informal notices to a delinquent owner followed by formal legal action as necessary. At any point in the collection process, the HOA and the delinquent owner could, but were not required, to negotiate a payment plan.
The new law clarifies that following collection policies is mandatory. In addition, the law provides a detailed list of minimum requirements for the content of a policy. One new requirement is that, before an HOA turns over a delinquent account to a collection agency or attorney, the HOA must send the owner a notice of delinquency containing certain detailed information. Since most HOAs were sending notices anyway, the new requirement should be a matter of updating the form for notices to make sure they have the required information.
Another more significant change is that HOAs are now required to make good faith efforts to coordinate with delinquent owners to set up a payment plan. The plan must, at a minimum, permit an owner to pay the delinquent amount in equal installments over a period of six months. It’s not clear how far HOAs can go in imposing additional terms as part of the plan (such as penalties for noncompliance). HOAs are not required to offer a payment plan: (1) if the owner does not occupy the unit and took the unit through foreclosure; or (2) if the HOA previously negotiated a payment plan with the same owner. In brief, most owners have one shot at obtaining a payment plan and making it work.
The new law also imposes significant new restrictions on HOA lien foreclosure. HOAs will not be able to foreclose their liens unless the delinquent owner owes an amount equal to at least six months’ worth of dues. HOAs also will not be able to foreclose their liens unless the executive board formally resolves “by a recorded vote” to take legal action. This duty cannot be delegated. If an HOA files a legal action without the necessary vote, the case can be dismissed and the HOA cannot assess its costs and attorney fees against the delinquent owner. The new law applies equally to third parties who purchase HOA liens for collection.
Collecting delinquent assessments has always been difficult for HOAs and the new laws will make it even harder. This will increase the burden on those owners who diligently pay assessments. But delinquent owners will benefit from the new protections, particularly the right to a payment plan. HOAs need to make sure that they are prepared when the new requirements go into effect on January 1, 2014.
Noah Klug is the owner of The Klug Law Firm, LLC, in Summit County, Colorado. His practice focuses on business, real estate, and litigation. He may be reached at Noah@TheKlugLawFirm.com or 970-468-4953.