Berding | Weil Community Association ALERT Newsletter
Legal News and Comments for Community Association Boards and Managers Issue #35 • January 2010
The Great Foreclosure Debate
Should Community Associations use Alternatives to Foreclosure to Protect Their Cash Flow?
By Tyler P. Berding, Esq.
There is currently raging a great debate. This one has nothing to do with national health care, war in the Middle East, or the future of the Washington Redskins. No, this debate is over whether community associations should have the right to use foreclosure as the ultimate delinquent assessment collection tool. Foreclosure is the enforcement device that allows a creditor, in this case a homeowners association, to force the sale of an owner's condominium or single family house to collect a delinquent association assessment.
The practical arguments among the various participants in this debate go back and forth something like this: Assessments are a community association's cash flow lifeline—if owners fail to pay, the association cannot keep its commitments. Foreclosure is a radical remedy—it costs associations more than they can possibly recover, so why do it? Foreclosure for failure to pay delinquent assessments is the only enforcement mechanism that works.
The legal arguments include: There is really no contract between owners and their association that gives the board of directors the right to foreclose because the owners weren't parties when the association was created. The CC&Rs are recorded against the title of the owner's interest and provide for lien rights and hence the right to foreclose. State legislatures have not clearly provided for an association's right to foreclose.
And finally, the moral arguments: A home is a sanctuary—how can we allow it to be taken away just to satisfy a small arrearage in assessments? We should not allow owners who do not pay their assessments to live on the backs of those owners who do. Everyone should pay his or her own way. Foreclosing on someone's home is immoral and community associations should have no right to do it. It just supports a large number of attorneys, property managers, and collection companies.
Anyone who has paid any attention to the articles, blogs, websites, and water cooler conversation about community associations and the recession has heard these arguments, or others like them. Can't be missed. And the underlying problem is real—thousands of community associations have real cash flow problems because owners are falling behind in their assessments. Enforcement activity is up, and that often means an increase in the number of properties entering the foreclosure process. People are losing their homes for a variety of reasons, but there has been an outcry over whether community associations should be able to enforce delinquent assessments through foreclosure. But we're getting ahead of ourselves. Let's back up and look at how we got here.
Community associations are creatures of statute. Unless you decided to have a mass Tenancy in Common (no legally recognized separate titles; few rules and no simple way to legally enforce them) or a Partnership of hundreds of individuals with no easy way to market your individual interest, a different statutory scheme of some sort was necessary to allow individual owners to share ownership of stacked or attached real property and to maintain it. And maintenance requires regular funding, so some means of obtaining regular owner contributions was also necessary. With a diminishing amount of land or availability of government services, the creation and perpetuation of community associations made sense for many reasons. By giving associations 'municipal functions', they had to also be given the power to "tax" to perform those functions and so state legislatures gave associations the power to levy and collect assessments.
But what exactly are these "assessments?" Are they really like a property tax, and if so, should they be collected by public entities? Are they like a charitable contribution, voluntarily made? Are they a payment for services rendered—managing and maintaining the property? Community associations do many of the same things that local public entities do—maintain streets and parks and community swimming pools. But they also do what private homeowners do—paint the buildings, put on new roofs, and pay the water bill.
Clearly homeowner associations are not cities, counties, or community service districts and municipalities have no interest in using their taxing powers to provide cash flow to homeowners associations. Community associations manage private property with ongoing obligations that require a steady stream of cash—so unpredictable voluntary contributions would be an unacceptable, not to mention, naïve, system of funding. No, what's left is what we've got—a legal obligation with a means of enforcement to insure that obligation is fulfilled. Regardless of anyone's position on funding priorities (roof then paint, or paint first?) the facts are inescapable—without a reliable means of funding maintenance, repair, and various other obligations, the physical plant of community associations would deteriorate and fail at a rate much quicker than we see today. There's no room in this debate for arguments that cash flow isn't necessary. And cash flow means owner assessments that can be relied upon.

"What type of insurance is typically carried by a condominium association?"
Condominium and many Planned Unit Developments have a blanket insurance policy covering the buildings for fire and other casualties on or to the common area and the premium is paid from the assessments paid by the owners. Coverage for an owner's personal property is not included. Liability insurance for claims against the association is included.
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