In the tough economic environment of the past few years, many condo owners have  faced job losses, pay decreases or just financial uncertainty. Unfortunately,  this sometimes leads to owners not paying their common charges.  

 “Obviously, delinquencies are always a problem for associations, but the current  state of the economy has certainly escalated this problem,” says Scott K. Penick, Esq. of McGovern Legal Services in New Brunswick. “We have seen quite an increase in delinquencies due to joblessness and  underemployment. It’s also resulted in our firm spending a lot of time developing new creative  solutions for collecting these delinquencies. The same old formula just doesn’t work these days,” he says.  

 Barbara Drummond, PCAM, CMCA, president of Prime Management Inc. in Barnegat  agrees with Penick. “I am seeing in a lot of cases what when the owners’ debt is greater than the value of the unit that’s when the percentage of people who are in default goes up,” she says. “I have seen a lot of that.”  

 Unpaid, overdue debt that is not collected can wreak havoc on a condominium  association. In small units, it can quickly cause the association to have  trouble meeting operating expenses. Even larger associations will eventually  feel the effects of the shortfall if multiple units fall into arrears.  

 “It affects the greater financial health of a building community,” says Steve Elbaz, president of Esquire Management, whose company manages  properties in Jersey City and Ocean Township. “When people come to buy an apartment, they review financials and if they see  people aren’t paying arrears, it raises red flags and in theory lowers the value of the  apartment.”  

 People Need to Know

 Associations should have a written procedure that is disseminated to everyone so  that residents know exactly the way things are done, and more importantly, that  things are done consistently to all unit owners.  

 “The governing documents should outline steps that will be taken if a unit owner  falls behind with their payments,” says Drummond. “That way it will be clearly stated and there will be a list of steps to follow.”  

 It’s vital for boards and managers to take a proactive role in collecting common  charge arrears to ensure that their condominium associations remain financially  stable.  

 Legally, it’s common property but ethically, it’s private information, so revealing to others that someone is late with their  payments is a judgment call on the part of the association.  

 The First Steps

 Each member of a community association is responsible for paying his or her  share of the common expenses. Common expenses are things like snow removal, swimming pool maintenance, and  lawn care. When a member does not pay his or her share, says Mary W. Barrett, a shareholder  attorney with the law offices of Stark & Stark in Lawrenceville, the other members must pay more to subsidize the  delinquent member. In the same way, when the association must pay its legal counsel to collect  those delinquent maintenance fees, the other members must pay more to subsidize  that cost, as well. “Fortunately, the governing documents of most condominium associations, as well  as New Jersey law, permit the association to pass on those costs to the person  responsible: the delinquent member,” she says.  

 When someone is late, the first step is usually to send them a letter with a  small fine.  

 “Two months delinquency is when we typically suggest that the association or  management refer the matter to us,” says Ronald L. Perl, a partner with the law firm of Hill Wallack LLP in  Princeton. “It is important to be aggressive these days; even more important to be  imaginative and use such techniques as rent receiverships or alternate theories  of recovery, like, for example, when a family member is residing in a unit  without paying rent. In such cases, we have been successful in getting  judgments against the occupants even though they are neither owners nor  tenants.”  

 Once the second month statement goes unanswered and they don’t pay again, that’s when the association’s lawyers get involved and take a more proactive role in resolving the  situation.  

 “It used to be that a letter from a lawyer would work well, but that has changed  a lot. Today, most people just throw the letter into the trash,” Elbaz says. “The only thing in my experience that is truly effective is a foreclosure action.”  

 Liens and Foreclosures

 An association’s best method for striking fear into a delinquent payer to collect common charge  arrears is filing a lien against the unit and foreclosing on it. After all,  once filed, the lien will protect the condo by blocking the unit owner from  selling or refinancing their unit without first paying off his or her arrears  to the condo association.  

 When a condominium's lien is filed, the condominium becomes a secured creditor  under the Federal Bankruptcy Code so if the delinquent unit owner files for  bankruptcy, the condominium will ultimately get a higher percentage of the debt  paid as a secured creditor than if it didn't file a lien.  

 “The first step is to put a lien on a property. While this sounds onerous, all it  does is tell the world you are making a claim for money. Other than that, it  doesn’t do too much,” Elbaz says. “It doesn’t create any urgency, even with the lender. There are thousands of mortgages  underwater so they wait for the last second to pay common charges.”  

 “If a second notice goes unanswered to a delinquent owner then the matter should  be turned over to an attorney for collection,” adds Drummond, “At that time a lien would be filed against the unit and a suit would be filed in  order to collect the debt.”  

 No one wants to throw anyone out of their home, which is why there are steps to  warn and help people who are behind with their payments.  

 “I like the idea of working out payment arrangements with owners who are late  with payments,” says Drummond. “I think if a debt is not too large it often works out. Especially if the debt is  only a few months, then a payment arrangement could work out. It’s up to the board to determine if they want to allow that. If the debt becomes  burdensome, beyond a few months then it’s best to move ahead with legal procedures.”  

 Penick acknowledges that it’s important for associations to stay on top of delinquencies. “We encourage associations to establish their own thresholds for turning over  delinquent accounts to our office, whether that’s two months or five-hundred dollars or whatever it is, but once a matter is  turned over to us, we are aggressive from the outset. Delay is often your worst  enemy in collections; so being aggressive is the only viable approach.”  

 “An association member will be given many opportunities to address his delinquent  maintenance fees before significant legal costs begin to accrue,” says Barrett. First, the association will send out reminder letters to the  member. After a certain point, if the debt is not paid, the account will be  referred to the association’s legal counsel.  

 “The attorney will typically send out a collection letter. The amount due in the collection letter will include the total debt plus a small  amount of legal fees to review the file, calculate the amounts due, and prepare  the letter. If, after 30 days, the member has not paid the account or made arrangements to  pay it, further action must be taken such as recording a lien against the unit  and filing collection litigation.”  

 If the letter from the lawyer doesn’t do the trick, at this point, legal fees start to be significant. Expenses  include a title search, preparation of a summons, a court filing fee, attorney  fees and an appraisal. That can easily range from $1,500 to $3,000 in the state  of New Jersey.  

 And, each time, says Barrett, the association’s legal counsel must perform work to collect the delinquent maintenance fees,  the association will charge these fees to the member’s account. Legal fees will continue to accrue against the member’s account until the matter is resolved and all amounts due are paid. Thus, while a member may believe his maintenance fees total only a couple  thousand dollars, the legal fees may eventually equal or exceed that amount. The association’s board of directors has an obligation to the association and all of the members  who pay their fees each month to see that this amount is recovered as soon as  possible.  

 The end result if the bank does not intercede on behalf of the homeowner could  very well be a foreclosure auction.  

 Elbaz agrees that when people are having a difficult time paying, contacting the  management company or board to explain their circumstances can at least start  the process. Of course, that doesn’t always happen and more often than not, people refuse to pay anything.  

 “It is important to assert the association’s lien rights so that if the lender begins foreclosure or there is a bankruptcy  filing, we already have a lien of record,” says Perl. “It gives the association a bit more leverage as a second creditor.”  

 Cause and Effect

 Even the best run condos will most likely face this issue eventually and it’s important that there is a plan in place to make up for the missing money.  

 “What they may have to do is stop paying bills or pay them late,” Elbaz says. “That means that when you call the plumber late at night to come out and fix the  boiler, and you owe him money, he’s not going to come.”  

 Other effects of non-payers are that the association may need to stop  non-essential services like landscaping, painting or even shut down a pool if  the arrears situation gets tight. More extreme boards will do assessments or  raise common charges to make up for the shortfall.  

 Another option is for members of the board or other residents stepping up and  prepaying future charges. Understanding that the money will eventually come in  via the foreclosure, this is one vehicle to keep the accounting solid. However,  it’s not always easy to get people to fork over more money than they need.  

 Keep in mind, that a condo association expecting a certain level of collection  to run its budget and the money does not come in, things can get problematic in  a hurry. That’s why an aggressive collection policy is important to keep disasters from  happening.   

 Keith Loria is a freelance writer and a frequent contributor to The New Jersey  Cooperator. Staff Writer Christy Smith-Sloman contributed to this article.