Assessment collection for Maryland condominiums. The legal “dos and don’ts” of collecting condominium assessments and a guide for establishing a condominium assessments collection policy.
The timely payment and collection of condominium assessments is essential to the financial well-being and efficient operation of a condominium association. The association’s Board of Directors has a fiduciary responsibility to stay on top of assessment collection so that delinquent condominium assessments do not accumulate. Excessive delinquencies not only deprive a condominium association of needed operating capital, but also affect its ability to borrow money and obtain FHA approval. This article provides an overview of the assessment collection for Maryland condominiums. Information is provided to help Condominium associations adopt their own condominium assessments collection policies and procedures that work best for their communities within the framework of Maryland condominium law.
ANNUAL ASSESSMENTS AND SPECIAL ASSESSMENTS
Collection of condominium assessments is the means by which a condominium funds its annual budget. Each year, assessments collection for Maryland condominiums the condominium association board of directors adopts a budget to cover operating expenses and an amount to be set aside for anticipated future expenses. The total budget cost is divided among the unit owners in the form of an annual assessment typically due and payable in equal monthly installments on the first day of each month
Sometimes condominium associations are faced with unanticipated major expenses in excess of the funds raised by the annual assessments. In such cases, governing documents give the board of directors the power to levy a “special assessment,” subject to restrictions imposed by applicable laws. Unit owners may be given the option to pay the special assessment in monthly installments.
PAYMENT OF ASSESSMENTS
Condominium assessments are traditionally paid by check using payment coupons and envelopes provided by the condominium association’s management company. More frequently, management companies send electronic coupons and/or assessment invoices by email and offer online payment by E-check, credit card or recurring ACH payment (direct debit). Coupons and invoices are often used as an opportunity to remind the unit owners that they can avoid late fees and interest by making timely payment on or before the specified due date.
ASSESSMENT COLLECTION POLICIES & PROCEDURES
Written policies streamline assessments collection for Maryland condominiums. It is recommended that all associations establish written assessment collection policies and procedures based on governing documents and applicable law. Written policies and procedures can be created under the rule making authority of the association and provide an objective framework under which the condominium association can treat all unit owners equally.
Written policies and procedures are a useful aid in the collection of condominium assessments because they can be published and distributed on a regular basis so that all unit owner members have ample notice of, and opportunity to understand, what is expected (e.g., due date and manner and method of payment) and the consequences for nonpayment (e.g., late fees, interest, returned check fees, acceleration, suspension of common element privileges, referral to legal counsel, and court costs and attorney’s fees if legal action is taken).
Written policies and procedures promote timely collection of condominium assessments by establishing a timeline for specified collection actions to be taken once a payment is missed. Written procedures instruct when an association should send out late notices and when to refer unresolved delinquencies to legal counsel. A timetable of deadlines for actions to be taken by legal counsel can also be specified, including sending demand letters and commencing proceedings to establish and/or enforce assessment liens, or pursue civil suits when assessments remain unpaid.
ASSESSMENTS PAYMENT INCENTIVES IN GOVERNING DOCUMENTS
1. Late Fees and Interest
When condominium assessments become past due, a condominium association can charge late fees and interest as permitted by governing documents and applicable law. Late fees and interest are not only an incentive to make timely payment, but also to help defray costs associated with delinquencies.
Under Maryland law, where a delinquency in the payment of condominium assessments has continued “for at least 15 calendar days,” the condominium’s governing documents may provide for the imposition of a one-time “late charge” of $15 or 10% of a delinquent assessment, whichever is greater. Maryland Condominium Act (“MD Condo Act”) § 11-110(e)(2). Additionally, whenever an assessment is not timely paid, a condominium association board of directors may charge interest from the due date until paid at a rate of “18% per annum,” unless a lesser amount is specified in the condominium’s governing documents. MD Condo Act § 11-110(e)(1). Governing documents may further define parameters for late charges and interest.
2. Acceleration of The Annual Assessment
Acceleration is another incentive for delinquent unit owners to make timely payments in the assessment collection process for Maryland condominiums. Most governing documents permit a condominium association to accelerate the entire balance of the unpaid annual assessment following nonpayment of a monthly installment. This means that the board of directors may declare the entire balance of the unpaid annual assessment immediately due and payable, such that monthly installments will no longer be accepted. Any attempt at acceleration by a condominium association must be permitted by governing documents and consistent with applicable laws.
In Maryland, the governing documents can provide for acceleration after one unpaid installment, if the association demands payment of the remaining annual assessment and notifies the non-paying unit owner within 15 days of nonpayment that the entire annual assessment will become due and constitute a lien on their unit if the monthly installment is not paid within 15 days of the notice. MD Condo Act § 11-110(e)(3)
3. Suspension of Common Privileges
Suspension of a unit owner’s privileges within the community can also be an incentive to make timely assessment payments in the assessment collection process for Maryland condominiums . The condominium governing documents often authorize the Board of Directors to suspend a delinquent unit owner’s common privileges such as use of common elements (e.g., swimming pool, exercise facilities, recreational amenities and parking), voting rights and/or ability to serve on the board of directors. Before suspending a unit owner’s privileges, the condominium association must comply with any notice or hearing requirements set forth in the governing documents and/or as require by statute.
In Maryland, a condominium association may only suspend a delinquent unit owner’s use of communally held common elements facilities for failure to pay condominium assessments if the specific suspension in question is expressly authorized in the recorded condominium declaration. In the case of Elvaton Towne Condominium Regime II, Inc. v. Rose, 453 Md 684 (2017) (“Elvaton”), the Maryland Court of Appeals struck down a condominium policy that suspended a delinquent owner’s right to use the pool and parking facilities. The court found that Section 11-108(a) of the Maryland Condominium Act only permits a condominium association to restrict a unit owner’s use and enjoyment of the common elements if such restriction is expressly authorized by the condominium declaration. Elvaton, 453 Md. at 701-06. In Elvaton, the declaration did not expressly authorize suspension of pool and parking privileges; instead, the suspension policy was based solely upon general rule making authority under governing documents, which was insufficient. Elvaton, 453 Md. at 705-06. The court did acknowledge that a condominium board has authority to generally adopt reasonable rules for parking, assessment collection, and use of the common elements. However, when it comes to suspending a specific unit owner’s right to use the common elements generally available to others, the authorization for such action must be expressly set forth in the condominium declaration, which is, in essence, an agreement of all unit owners who become members of the association. If not spelled out in the declaration, then such a suspension constitutes “an impermissible taking” and an unlawful “revocation” and “infringement of [an] owner’s property rights.” Elvaton, 453 Md. at 703-06.
The Maryland condominium Act contains a statutory “dispute settlement mechanism” that also must be taken into consideration when suspending a unit owners common privileges. Unless the governing documents state otherwise, the statue sets forth the procedure for providing notice and a hearing to a delinquent unit owner before the condominium association may “impose a fine, suspend voting, or infringe upon any other rights of the unit owner or other occupant for violation of rules….”.MD Condo Act § 11–113.
LATE NOTICES
A typical first step in the assessment collection procedure for Maryland condominiums is to send out a late notice to any unit owner who has not paid an assessment installment within a specified time following the due date. The late notice is a reminder that the assessment payment is overdue and specifies the amount and any late charges and/or interest due as a result of non-payment. If payment is not forthcoming, follow-up late notices may be sent depending on the association’s collection policy.
DEMAND LETTER (REFERRAL TO LEGAL COUNSEL)
If one or more late notices do not result in a payment, the second step in the typical assessment collection procedure is to refer the assessment delinquency to legal counsel for collection. Legal counsel will attempt to resolve the matter amicably by sending a demand letter to the unit owner. In addition to itemizing the current amount due and requesting payment by a certain date, the demand letter provides notice of any immediate or pending acceleration of the entire remaining balance of the annual assessment and describes other legal actions that may be taken, such as: (1) recording an assessment lien against the non-paying unit owner’s condominium unit that can be enforced by way of foreclosure (i.e., forced sale of the unit to obtain funds to pay the amount due); and/or (2) filing a lawsuit seeking a personal monetary judgment against the unit owner in the amount due, including late fees, interest, costs, and reasonable attorneys’ fees as permitted by governing documents and applicable law.
In 1985, the Maryland General Assembly enacted the Maryland Contract Lien Act (“MD Contract Lien Act”) to govern, among other things, liens arising from unpaid condominium assessments under the terms of governing documents recorded in the land records. Demand letters sent on behalf of condominium associations in Maryland must comply with this Act as a precondition to establishing and enforcing an assessment lien against a delinquent unit (discussed below). A unit owner must be provided with specified information about the basis, nature, and amount of the lien owed, as well as the unit owner’s right to contest the establishment of a lien by filing a complaint in the circuit court where the lien is sought to be established within 30 days after receiving notice. MD Contract Lien Act, § 14-203 (b)(1) – (7). The Demand Letter containing this information must be served upon the unit owner as specified in Section 14-203(a) of the Maryland Contract Lien Act (e.g., certified or registered mail, personal delivery, and some cases posting on the property).
COMPLIANCE WITH DEBT COLLECTION AND LICENSING LAWS
Demand letters and many late notices constitute an attempt to collect a delinquent debt and, to the extent applicable, these and other assessment collection efforts must comply with debt collection conduct and notification requirements imposed by the Federal Fair Debt Collection Practices Act and the Maryland Consumer Debt Collection Act.
In Maryland, persons who fall within the definition of a “collection agency” (e.g., those who collect consumer debt on behalf of another) must be licensed. Maryland Collection Agency License Act (“MCALA”) § 7–301(a). The United States District Court for the District of Maryland has held that a management company is a “collection agency” as defined in Section 7-101(c)(1)(i) of MCALA whenever it seeks to collect a debt on behalf of a homeowner’s association. Fontell v. Hassett, 870 F. Supp. 2d 395, 409 (D. Md. 2012) (“Fontell”). The same rationale applies to condominium associations. Therefore, any management company sending demand letters to unit owners or otherwise seeking to collect an assessment debt for a condominium association in Maryland must have a collection agency license or it will expose itself to criminal misdemeanor imprisonment, fines, or both (MCALA § 7-401(b)), and also subject itself to civil liability under the Maryland Consumer Debt Collection Act, the Maryland Consumer Protection Act, and possibly the Federal Fair Debt Collection Act. Fontell, 870 F. Supp. at 409.
Moreover, in addition to the management company entity itself, an employee of an unlicensed management company can be held personally liable for seeking to collect a debt on behalf of an association without a collection agency license in Maryland. Fontell v. Hassett, 891 F. Supp. 2d 739 (2012) (motion to amend earlier court order holding individual management company employees liable was denied). However, once a management company has a collection agency license, its “regular employees” do not require a license while engaging in assessment collection efforts if “acting within the scope of [their] employment.” MCALA § 7-301(b)(2).
ASSESSMENT LIENS AGAINST A CONDOMINIUM UNIT
If demand letters do not result in payment of delinquent condominium assessments, a condominium association’s board of directors has the power to establish and enforce an assessment lien against the non-paying unit owner’s condominium unit. Once an assessment lien attaches to the unit, it places a “cloud on title,” by encumbering the ability to sell the unit, similar to a mortgage, such that the lien must be paid off in connection with any future sale before the unit owner receives any part of the remaining sale price. A title company representing the purchaser of the delinquent unit will likely discover the assessment lien before settlement and require that it be paid as a condition to issuing a title insurance policy. Without a title insurance policy, an institutional lender will not provide funding for the purchase of a unit. Additionally, a unit owner with an assessment lien on their unit will have difficulty obtaining financing. Thus, an assessment, lien, to this extent, serves to secure an association’s assessment debt.
Additionally, once an assessment lien attaches (and providing that required notices have been provided), it can be used by the condominium association to immediately force the sale of the unit as a source of funds to pay the past due amount (the “enforcement and foreclosure of the lien”), without having to wait for a purchaser to come along and acquire the unit.
Assessments collection for Maryland condominiums usually does not require enforcement and foreclosure of the lien. Foreclosures are expensive and used as a last resort in the collection assessment process when they make economic sense. However, the prospect of having a lien established against one’s unit, or the desire to have the lien removed, is often enough to resolve any dispute over past due condominium assessment without the need for further legal action.
1. What’s included in a Maryland assessment lien?
In Maryland, assessment liens may consist of unpaid assessments, “together with interest, late charges, if any, costs of collection, and reasonable attorneys’ fees.” MD Condo Act § 11-110(d). If permitted by the governing documents (and provided 15 days’ notice of acceleration has been given), a failure to pay a single installment will result in the remaining annual assessment coming due (“acceleration”) upon demand of the condominium association. MD Condo Act § 11-110(e)(3). In such a case, the full amount of the remaining unpaid annual assessment for the balance of the fiscal year also becomes part of the assessment lien. MD Condo Act § 11-110(e)(3).
2. How is a Maryland assessment lien created?
In Maryland, an assessment lien against a unit must be established or “created” in favor of the condominium association by the filing of a “Statement of Lien” in land records of the county where the unit is located in accordance with the procedures set forth in the Maryland Contract Lien Act. Select Portfolio Servicing, Inc. v. Saddlebrook West Utility Company, LLC, 455 Md. 313, 336 (2017). Only then will an assessment lien attach to the delinquent unit. A form Statement of Lien is provided in Section 14-203(j) of the Maryland Contract Lien Act. As a precondition to seeking to create a lien, the unit owner whose property is affected must be given the notices as required by the Maryland Contract Lien Act § 14-203 (a) and (b) (described above), within 2 years of a nonpayment in violation of the governing documents. MD Contract Lien Act § 14-203(a)(1).
In cases where the assessment is uncontested, the lien is created non-judicially by simply filing of the Statement of Lien in land records. MD Contract Lien Act § 14-203(g). In cases where the assessment is contested in court, the lien is created judicially by the filing of a Statement of Lien in land records, upon the order of a court that a lien be imposed. MD Contract Lien Act § 14-203(h).
3. How is a Maryland assessment lien foreclosed upon?
Assessment collection for Maryland condominiums sometimes requires foreclosing upon a lien. In Maryland, a residential unit may be foreclosed upon to satisfy an assessment lien in the same manner and subject to the same requirements as the foreclosure of mortgages or deeds of trust on property containing a power of sale or an assent to a decree. MD Contract Lien Act § 14-204(a). See Maryland Real Property § Article 7-105 and Maryland Rules § 14-201 et seq. An action to foreclose on an assessment lien must be brought within 12 years following recordation of the statement of a lien, MD Contract Lien Act § 14-204(c), or within a shorter time period required by the governing documents. However, unlike other real property foreclosures, a foreclosure sale involving a condominium unit in Maryland may only be pursued to the extent that damages secured by the lien consist of: (1) delinquent periodic assessments or special assessments and any interest; (2) reasonable costs and attorney’s fees directly related to the filing of the lien that do not exceed the amount of the delinquent assessments, excluding any interest; and (3) do not include fines imposed by the governing body or attorney’s fees or costs related to recovering the fines. MD Contract Lien Act § 14-204(d)(2). Ironically, although a condominium association in Maryland may impose fines for late payment (the “late fees” discussed above under MD Condo Act § 11-110(e)(2)) which may be made part of the lien itself under MD Condo Act § 11-110(d)(1), such late fees may not constitute the basis of a condominium association’s foreclosure sale action.
4. Super Priority Liens for Condominium Assessments in Maryland
Assessment liens in Maryland have priority, up to a specified amount, over the liens created by a lender’s earlier-filed first mortgage or deed of trust. This is referred to as a “super priority lien” and references the fact that in the event of a foreclosure sale, the super priority portion of the assessment lien must be paid to the condominium association from the sale proceeds before satisfying the lien amount of an earlier-filed lender’s mortgage or deed of trust.
In Maryland, the super priority lien is limited to four months of unpaid assessments or $1,200.00, whichever is less, and may not include interest, collection costs, late charges, fines, attorneys’ fees, or special assessments or any other costs. MD Condo Act § 11-110(f)(3). The super priority lien in Maryland only provides priority over “a holder of a first mortgage or deed of trust recorded against the unit on or after October 1, 2011.” MD Condo Act § 11-110(f)(2). An association’s super priority lien does not provide priority over mortgages or deed of trust recorded before October 1, 2011,nor does it provide priority over liens or secured interest held by the state, county, or municipality such as a tax lien. MD Condo Act § 11-110(f)(1) and (2).
When faced with a foreclosure proceeding, a lender may offer to pay off the super priority lien amount on behalf of the delinquent unit owner in order to prevent the foreclosure and thereby protect its mortgage or deed of trust.
CIVIL LAWSUIT TO OBTAIN PERSONAL JUDGMENT
A condominium association can also file a civil lawsuit seeking a personal monetary judgment from a court in its favor and against the delinquent unit owner in the amount of the unpaid assessment, together with authorized late fees, interest, court costs and reasonable attorneys’ fees. A lawsuit seeking a personal judgment can be filed in addition to or in place of a lien foreclosure action, or can be used to make up any deficiencies remaining after foreclosing on the assessment lien. Once the court enters a personal monetary judgment against a delinquent unit owner, the association can seek to collect on the judgment by garnishing the unit owner’s wages or bank accounts and/or rent (if the unit is being rented), subject to restrictions imposed by applicable laws. Additionally, a personal judgment entered against unit owner by the court and recorded in the courthouse will create a judgment lien not only against the unit in question, but also as to and any other real property located in the county or jurisdiction of filing. The judgment can also be recorded among the land records of a different county or jurisdiction thereby extending the judgment lien to any real property located within the boundaries thereof. As with an assessment lien, a judgment lien also creates a “cloud on title” such that property cannot be transferred “free and clear” of the lien unless it is paid off by prior to transfer of title. Click here to read about legislation which limits the ability of Maryland condominium associations to question unit owner debtors in assessment collection actions.
PAYMENT PLANS
During the assessment collection process, it may be appropriate to agree upon a payment plan with unit owners who fall behind on their assessment payments. Payment plans can save the association the time and expense of pursuing legal action and provide a unit owner member with time needed to bring their account current. Payment plans should be reserved for those cases where timely repayment of a past due amounts under the proposed plan is feasible and likely, such as where a unit owner is able to pay condominium assessments going forward but needs help catching up on missed payments. Payment plans can also be used as a means of resolving a payment dispute by allowing a unit owner to pay off an accelerated annual assessment together with interest, late fees, costs and attorneys’ fees, if any. Payment plans should be made part of a contractual agreement between the association and the unit owner that sets forth the amount of each payment, its due date, and the mutually agreed-upon consequences of failure to make a scheduled payment. A hierarchy for application of payments pursuant to the association’s collection policy can also be included to specify which fees are paid first (e.g., court costs, return check charges, interest, late fees, and lastly unpaid assessments).
NOTE ABOUT TERMINOLOGY:
The term “condominium association” is used in this article to describe the organization or entity that governs the affairs of the condominium in accordance with the condominium bylaws and declaration, and whose members consist of all condominium unit owners. “Condominium association” is the terminology commonly used for this purpose. However, the Maryland Condominium Act refers to a condominium association as a “council of unit owners.”
The term “governing documents” is used to refer to the condominium declaration and bylaws which filed in the land records office of the county where the condominium is located. These documents establish the condominium regime and control its governance.
The term “board of directors” is used to refer to the administrative entity made up of board members that have authority under the condominium bylaws and declaration to act on behalf of the condominium association.
NOTE ABOUT AUTHOR:
Nicholas D. Cowie is a partner in the law firm of Cowie Law Group, P.C. and has been representing condominiums for over 29 years. The law firm of Cowie Law Group, P.C. provides general counsel legal services to condominiums throughout the State of Maryland and the District of Columbia, including assessment collection for Maryland condominiums, drafting resolutions, developing assessment collection policies, contract negotiation, legal opinions, foreclosure actions, litigation, arbitration, mediation services, bylaw amendments and other general counsel services tailored to condominiums associations and homeowners associations. The law firm of Cowie Law Group, P.C. offers flat fee assessment collection services with deferred billing. Please contact our firm for references.
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NOTE ON LEGAL ADVICE: This Article should not be relied upon as a legal advice applicable to any specific case concerning assessment collection for Maryland condominiums. Rather, it is a general statement of legal principles that may or may not apply to your Maryland condominium. The individual facts of each case must be analyzed to determine the application of law. Speak with a Maryland condominium assessment collection law attorney at Cowie Law Group, P.C. for a consultation relative to your specific situation.