The California Legislature joined all of us in the community association industry in ringing in the New Year. As typical, the Legislature has been hard at work doing what we hire them to do—legislate.
This newsletter will discuss new laws concerning dues and assessments. The March issue will discuss other new laws.
AB 137; Assessment Collection. Assembly Bill 137 is effective as of January 1, 2006. It amends Civil Code sections 1365.1 and 1367.1 and adds new Civil Code sections 1367.4 and 1367.5.
Media Attention. Newspaper reports of community associations foreclosing upon homes for delinquencies of less than $200.00 got the legislature’s attention. After a rash of media reports on the pitfalls of non-judicial foreclosure, the legislature passed extensive requirements for both judicial and non-judicial foreclosure processes. The new law requires associations to give more notices and advisements to homeowners. Assessment collection is now a very technical process. If mistakes are made, the community association must start over at its own cost.
Pre-lien and “Meet and Confer.” In addition to previous requirements, the association must advise the homeowner of his or her rights, including the homeowner’s right to submit the assessment dispute pursuant to an association’s “meet and confer” rules before a lien can be put in place. This “meet and confer” process is often referred to as “internal dispute
resolution” or “IDR.” Typically with IDR, the board selects one board member to meet with the homeowner and discuss a possible resolution of the delinquency. Community associations must offer IDR to the homeowner to resolve the delinquency. Community associations should therefore adopt an enforcement policy which includes IDR.
Lien. The decision to record a lien must be made by a majority of the board of directors in an open meeting. The board’s vote to record a lien must be made a part of the minutes.
Recorded Lien. Within 10 days after the lien is recorded, a copy of the recorded lien must be sent by certified mail to every owner of the property. This may be difficult because it may take longer than 10 days for the association to receive the recorded lien back from the recorder’s office.
Initiating Foreclosure. Before an association can “initiate foreclosure,” the association must advise the homeowner of his or her right to submit the assessment dispute to alternative dispute resolution or ADR. This is a more formal process than the “meet and confer” process. The homeowner can select arbitration or mediation with a neutral third party to resolve the assessment dispute.
Both processes can become expensive. If the association wants to seek non-judicial foreclosure, then the homeowner can select binding arbitration. This means the association is bound by the decision of
the arbitrator, even if the decision is wrong. There is no right to appeal a decision in binding arbitration, which is one reason to avoid non-judicial foreclosure.
A decision to initiate foreclosure can only be made by the board of directors in closed executive session of the board. The decision of the board to foreclose must be made at least 30 days prior to the public sale of the house or condominium. In order to maintain the homeowner’s privacy both during the meeting and in the minutes, the delinquent homeowner must be referred to by the property parcel number, rather than his or her name.
The homeowner’s property cannot be foreclosed upon until the amount of the delinquent assessment—excluding interest, late fees, and costs—is at least $1,800.00, or until the homeowner is at least one year delinquent in the assessments. This does not mean that an association must wait until this $1,800.00 threshold is met to begin the assessment collection process.
Indeed, if the association were to wait, it would greatly increase the chances that an owner would be unable to pay the delinquent assessments or would declare bankruptcy. The association should strive to record a lien on the house or condominium as early as possible in order to secure the association in the event of a foreclosure by the mortgage company or a bankruptcy.
The association should establish a clear and reasonable assessment collection policy which takes into consideration all of these new laws.
Right of Redemption. After the house or condominium is sold, the homeowner has 90 days to pay all delinquent assessments and charges. If the homeowner does so, the house or condominium is returned to him or her. This will likely depress the price of the foreclosure at public sale of the house or condominium. Any investor who buys the house or condominium may simply lose it if the homeowner pays off the delinquency and other charges within the 90 day period after sale. This will likely dampen an investor’s interest in buying such property and the association may end up owning the house or condominium.
Judicial Foreclosure. Generally, the preferred method of assessment collection is judicial foreclosure. Under non-judicial foreclosure, the association’s only remedy is the sale of the homeowner’s house or condominium. Under the judicial process, however, the association receives a personal judgment against the homeowner, which allows the association not only to sell the home, but to collect directly from the homeowner’s wages, attach the homeowner’s bank accounts, sell the homeowner’s car, etc. Additionally, if the homeowner rents the house or condominium, the court can assign the rent to the association.
Under non-judicial foreclosure, the association has only one collection option—to sell the home. The judicial process, on the other hand, adds much greater flexibility and a range of options to suit the needs of community associations. Remember: the objective of assessment collection is not to sell the home, but to collect the delinquent assessments.
Annual Assessment Collection Disclosures.
Unfortunately, this new law will require associations to revise their assessment collection policies. An association is required to distribute its assessment collection policy to its homeowners annually. Legal counsel should be consulted to draft a comprehensive assessment collection policy which complies with the new law and the provisions of the association’s CC&Rs.
Additionally, an association is required to distribute the statutory “Notice of Assessment and Foreclosure” on an annual basis. For a copy of the newly-revised “Notice of Assessment and Foreclosure,” please email us.
More new laws for 2006, including:
- Election and Balloting Procedures
- Giving Away Common Area
- Inspection of Association Records by Owners