Have Homeowners Associations Crossed the Line? Homeowners Associations Are Quick to Pursue Foreclosure for Unpaid Assessments

by Marianna Kiselev October 12 2009, 09:38
I.  Introduction  

Common Interest Communities have become a way of life for the American people.  Millions of Americans reside in gated communities governed by homeowners associations. [1] These communities are growing in popularity for numerous reasons.  One such reason is that families want to live and raise their children in an environment that fits their needs and desires. [2]  Another reason is that people feel a sense of security and stability in a gated community. [3] 

However, these communities have not escaped strong criticism for their burdensome restrictions, excessive regulation and aggressive enforcement.  Critics argue that the disadvantage of living in such a community is that homeowners have to comply with a myriad of restrictions and covenants and failure to do so can result in fines. [4]  Critics also allege that the zealous homeowners associations often times abuse their powers when enforcing the rules and penalties. [5] 

 

With the current economic crisis homeowners associations are faced with difficult choices of how to keep the community alive but also keep members in their homes.   As the economy is getting worse homeowners are not only falling behind in their mortgage payments but they are also struggling to pay their monthly assessment fees. [6]  As more homeowners leave the area, those remaining have to take the burden of paying additional fees to maintain their communities. [7]  This is raising a myriad of issues concerning what should be done to keep these communities alive. In many states, associations are pursuing non-judicial foreclosure against homeowners who have not paid their assessment fees. [8]  Many homeowners are outraged because they may be on the verge of losing their primary residence and their largest investment. [9]  What can homeowners associations do to collect their unpaid fees?  Should resorting to foreclosure be an option or is that an abuse of power?  Should homeowners associations have to pursue other remedies to collect their debt before resorting to foreclosure?  What are the limits on the power of homeowners associations?  What can homeowners do to prevent foreclosures?  What is the role of the courts and the legislature to put limits on the power of homeowners associations? 

This article considers and criticizes the current laws that have been enacted in several states and proposes solutions to address these questions.  Specifically, this article will focus on non-judicial foreclosures which accord less protection to the homeowners. [10]  Part II discusses the general structure and law governing common interest communities.  Part III analyzes how various states have responded to the issue of homeowners associations pursuing non-judicial foreclosure on members who fail to pay their assessments.  Finally, Part IV combines the various state approaches and creates a solution that attempts to address the concerns of the homeowners associations and the members.

II.    The Structure of Common Interest Communities 

Common interest communities consist of properties that are burdened with restrictions controlling the use of the property, requiring homeowners to pay assessments for maintenance of the community property, and assessing fines for violations. [11]  The restrictions are imposed in the community’s declaration of covenants, conditions, and restrictions, the bylaws, and the rules adopted by the board or the owners. [12] 

 

Common interest communities are managed by a board of directors elected by the owners. [13]  The declaration outlines the power of the board of directors to collect assessments from individual homeowners for the maintenance of common areas and to take actions against owners that fail to pay their assessments, such as placing a lien on the property or pursuing foreclosure if the assessments are not paid. [14]  Furthermore, the board of directors can charge a late fee with interest for delinquent assessments. [15]   

           

Common interest communities are typically incorporated as non-for-profit corporations and governed by a board of directors. [16] Therefore, the principles of corporate law apply to the decisions of the board of directors. [17] For instance, courts apply the business judgment rule when assessing the board’s actions. [18]  Consequently, the court will not interfere with the board’s decision unless it appears that there fraud, self-dealing, or unconscionable conduct. [19]  This gives the board of director substantial discretion to decide what type of method to use when collecting unpaid assessments. [20]  With the current economic conditions, this is becoming a growing concern because there has been a substantial increase in the amount of homeowners being unable to pay their assessments. [21]  As a result, homeowners associations are increasingly foreclosing on property owners for minor unpaid dues. [22]  Do homeowners associations have the power to foreclose on a member’s property for failing to pay assessments?  

           

In most states homeowners associations have the power to foreclose on property for unpaid assessments.  The courts in various states have reasoned that the homeowner’s association’s lien on the property for unpaid assessments constitutes an interest in real estate to secure debt and therefore can be foreclosed upon. [23]  Furthermore, most state statutes contain a provision allowing foreclosure for unpaid assessments. [24]  With the current economic conditions, the homeowner’s association’s unregulated power to pursue foreclosure is becoming a growing concern because there has been a substantial increase in the amount of homeowners that are unable to pay their assessments. This article will focus on whether the homeowners associations are abusing their power and resorting to foreclosure for low amounts of debt without exhausting other remedies.  Many states have responded to this growing concern by enacting legislation restricting the association’s power to foreclose on property. 

 III.       Proposed Legislation  

The following is a brief survey and critique of three states that have enacted or attempted to enact legislation to deal with homeowners associations foreclosing on properties for unpaid assessments. 

A.    Texas Legislation  

The Texas legislature has been consistently fighting over the past several years to restrict the powers of homeowner associations, especially with regards to foreclosure.  Republican Senator Burt Solomons, who has been the lead proponent of the bills, stated that “things have gotten out of control with homeowners associations … it's amazing that the courts have allowed them to foreclose on homesteads for something as minor as getting behind on association dues…we have to restore some balance." [25] Senator Solomons, along with several other Texas state senators, proposed four bills significantly restricting homeowners’ associations’ rights to foreclose on property but only one has been enacted into law. [26] 

The first proposed bill was designed to limit the homeowners’ associations’ powers to foreclose on properties by requiring them to take preliminary steps before resorting to foreclosure. [27] For instance, the bill would require a homeowners association to “visit a board member before any foreclosure, stopping a foreclosure if a homeowner paid back dues or agreed to a payment plan, and extending the time a foreclosure owner could buy a home back.” [28]  This bill was never signed into law. [29]  

The second bill called for homeowners associations to reimburse a property owner if their home was sold for less than the most recent appraisal of the property. [30] The homeowners association would have to reimburse the owner the difference between the sale price and the appraisal value. [31]  This bill was also not passed into law. [32] 

The third bill which has been passed into law restricted the power of homeowners associations to pursue foreclosure for unpaid attorney’s fees or overdue fines. [33]  The bill also allows home owners to redeem their property 180 days after the foreclosure sale. [34]            

Finally, there has been another recently proposed bill that would drastically limit the power of homeowners associations.  The proposal is to submit a “constitutional amendment to Texas voters that would prohibit foreclosures by associations on homesteads within their jurisdiction.” [35]  The bill would still allow the association to place a lien on the property for which they can receive payment once the owner decided to sell the house voluntarily. [36]  This is expected to receive strong opposition and probably will not be passed into law. [37] 

           

Despite the active role of the Texas legislature in trying to reform the rights of homeowners little has actually been done.  The most recent proposal, taking away the power of homeowners associations to foreclose, is an extreme solution and will not work for several reasons.  First, this type of solution does not effectively deal with the problem of homeowners not paying their dues.  Rather it gives homeowners a chance to take advantage of the system and avoid their obligations to the community.  Second, this would nullify the power and authority of the board and threaten the existence of the association because the association will have no recourse against delinquent homeowners. [38]  The current law gives homeowners more time to redeem their property but does not address the issue of foreclosing for unpaid assessments. 

 B.     California Legislation          

Similarly, in California homeowners associations were accused of abusing their powers and pursuing non-judicial foreclosures to collect relatively small debts.  For instance, people were losing their homes in California for failing to pay a couple hundred in dues. [39]  While these may be extreme examples the legislature in California noticed and decided to take action.  Senator Denise Moreno Ducheny sponsored a bill that would require homeowners associations to use small claims court to collect unpaid assessment sums below $2,500. [40]  Ducheny told the Senate Committee hearing for the bill that “often for less than $200 people are losing their homes and being evicted without the due process rights given to tenants…we understand the need for everyone to pay their agreed-upon debts, but we also want to protect the equity of homeowners and their due process rights.” [41]     

The proposed bill was amended several times and became effective January 1, 2006. [42]  Known as Chapter 452, the new law would greatly limit the power of homeowners associations to foreclose on properties.  Under Chapter 452, homeowners association can pursue judicial and non-judicial foreclosure only if the assessment debt is $1,800 or more and the debt must also be more than 12 months delinquent. [43]  If these requirements are not met the homeowners association can file a civil action in small claims court to collect the debt. [44]  Alternatively, the homeowners association can file a lien on the property upon which it can foreclose later after the $1,800 or 12 month delinquency thresholds are met. [45] 

 

Chapter 452 also toughens foreclosures notices and provides procedures that the board of directors must follow when deciding whether to pursue foreclosure.  For instance, the homeowners association’s board of directors “must make a formal decision to foreclose upon a lien at an executive meeting of the board, by a majority vote, and at least 30 days prior to any foreclosure auction to sell the property.” [46]   The association must also send legal notification to the homeowner regarding the foreclosure and provide an itemized list of the delinquent assessments. [47]  Finally, the law also provides that homeowners associations should participate in alternative dispute resolution to settle the disputes before resorting to litigation or foreclosure.[48]  For instance, a homeowner has the right to seek a meeting to discuss the delinquent debts and try to figure out a way to pay back the assessments. [49] There are also options for a formal arbitration process where a neutral third party mediates the dispute. [50] 

California’s law is the best approach to dealing with the foreclosure issue but it also has its drawbacks. First, the law significantly restricts the homeowners’ associations’ power to foreclose on properties for unpaid assessments.  This addresses the possibility of the board of directors abusing their power and makes them take preliminary steps before resorting to such a drastic measure.  This approach strongly encourages alternative dispute resolution which is in the best interest of the property owners and the association because it saves costs and time.  However, the law does not effectively address the issue of transparency in the board’s decision making process or the lack of communication between the board and the members.   

C.    Nevada

Finally, Nevada, among several other states, has proposed solutions focusing on alternative dispute resolution and increased transparency of the board’s decision making.  For instance, Nevada's legislature passed a law in 1991 that was designed to increase the rights of homeowners in common interest communities.  Specifically, the bill provides that members may attend and speak at all of the association’s meetings. [51]  In addition, the bill provides homeowners with greater access to financial statements of the association. [52]  For instance, the homeowners associations are required to send the members an annual statement of the association’s budget. [53]  Members shall have open access to all financial documents except those dealing with the individual owner’s unit. [54]  Furthermore, before any litigation the association must send a statement to the owners describing the potential costs of the litigation and an explanation of the benefits and risks. [55] In addition, the law restricts the power of homeowners associations to pursue foreclosure for unpaid fines and places a cap on fines which may not exceed $100 per violation or a total of $500, whichever is less. [56] Finally, an Office of the Ombudsman for Owners in Common Interest Communities was created which was designed to provide education to homeowners and board members to help them better understand their rights and obligations under the governing documents and state laws. [57] 

 

Even though Nevada’s law may not be as comprehensive as the measures taken in California it provides a good idea of possible ways to increase the transparency of the board’s decision making process.  Providing greater access to financial statements and allowing members to attend and speak at board meeting provides members with the ability to get involved in the decision making process.  It also gives homeowners a chance to evaluate the financial condition of the community and determine whether foreclosure is necessary.  Foreclosures have the tendency to bring down the value of homes in the neighborhood and also increase the assessment fees for other members. [58]  Therefore, giving members a chance to participate in the decision making process the rate of foreclosure may decrease.  Also, creating an office which provides information to the board members and homeowners is a great way to ensure that the decisions are as a result of an informed board and homeowners are aware of the risks and disadvantages of the their actions. 

 

While this bill increases transparency and communication among board members and property owners it does not address the issue of foreclosing on property owners for unpaid assessments.  More limits are necessary on homeowners’ associations’ power to pursue foreclosure because there is a possibility of abuse. [59]

IV. Solution 

An effective solution to this problem is going to take a balanced approach to the issue.  There needs to be a balance between the individual homeowner’s interest in preserving their equity and the association’s interests in preserving the community. 

A.    Minimum Threshold Required Before Pursuing Foreclosure  

The California approach has put reasonable limits on the homeowners association but can still use improvement. First, creating a minimum debt that the homeowner must accumulate before foreclosure is pursued is a good way to approach the problem.  Homeowners associations should not be foreclosing on people for owing just a couple hundred in debt when their house has greater. [60] Therefore, placing a limit will prevent the abuse of power and will give the homeowner a chance to remedy the problem before foreclosure is pursued. [61]  The legislature should consider increasing the limit from $1,800 to provide greater protection for homeowners.  The reason greater protection is necessary is because “a home is one of the most valuable assets a person may ever own.” [62]  In addition to the minimum threshold, requiring the homeowners associations to take the delinquent property owner to small claims court to recover the unpaid assessments is a good way to make the associations pursue other remedies before resorting to foreclosure.   

 B.     More Transparency in the Board’s Decision Making   

Creating transparency in the board’s decision making process will prevent the abuse of power and will make it easier to hold the board accountable when there has been wrongdoing.  Transparency makes the decision making process look legitimate and makes it easier for the homeowners and the court to evaluate whether there has been wrongdoing.  Some possible ways to accomplish transparency is by making the board members provide written financial statements of the homeowners’ delinquent fees, providing notice when there are delinquencies, and meeting with the homeowners to discuss a possible solution to the problem. [63]  Furthermore, providing the time and place of all the board’s meetings and making all the information available to all parties is necessary to increase transparency.  

C.    Increased Communication between Members and Homeowners Associations  

Increasing communication between the members and the homeowners association will help solve this problem.  Many homeowners do not have a positive opinion of the board of directors. [64] While this may be a natural reaction because the board is required to enforce the restrictions, impose fines, and take other unfavorable measures against members this does not have to be a cruel and hostile process.  By increasing communication this can increase the feeling of community and understanding among the members and the homeowners association. First, the homeowners association should let the members express their opinions and provide insight into what is happening in the community. [65]  For instance, when a member is facing foreclosure the homeowners association should let all the members provide insight at the meeting and try to propose solutions.  This will help the members feel that they also have a say in what is happening in their community and will encourage creative solutions to solve the financial difficulties.  After all, the attraction of common interest communities is that they are environments where people work together not against each other to live comfortably.   

D.    Flexibility of Homeowners Associations  

Homeowners associations need to be flexible, especially in this struggling economy.  Flexibility allows for good relations between the board and the members. That can be accomplished by providing a grace period for owners that cannot afford to pay their fees for a couple months and stopping the accumulation of fees until the homeowners have caught up in making payments. Another possibility is creating a payment plan that can help delinquent homeowners pay back their debts in smaller monthly payments rather than one large sum. [66] This will increase the likelihood that homeowners facing financial difficulties will be able to pay back their debts.   

V.  Conclusion 

The legislature needs to balance the interests of the homeowners associations and the individual members.  The new law needs to ensure mechanisms so that homeowners do not take advantage of the system and avoid paying their fees.  The law also needs to ensure that homeowners associations are not abusing their powers and pursuing foreclosures when other steps can be taken to cure the debt.  These communities constitute a large part of the housing market and truly provide a value to many peoples’ lifestyles.  Therefore, the solution is not to abolish these communities completely or to enact laws that effectively get rid of their power to function but rather to create a greater sense of community and support by stressing transparency, communication, and flexibility.  This type of solution will foster good relations which will improve the value that homeowners place on their community and will give them a desire to remain there in the future.   



[1] Paula A. Franzese, Privatization and Its Discontents: Common Interest Communities and the rise of Government for the Nice, 37 Urb. Law 335, 335 (2005).

[2] Id.

[3] Id. 

[4] Id. at 340.

[5] Id.

[6] Jeff Collins, Homeowner Association Delinquencies on the Rise, The Orange County Register, September 28, 2008. 

[7] Id. 

[8] Jim Wasserman, For Want of $120, House was lost more Homeowners Association using Foreclosure as Tool to collect dues, Milwaukee Journal Sentinel, February 22, 2004. 

[9] Id. 

[10] Black’s Law Dictionary 674 (8th ed. 2004) (defining “nonjudicial foreclosure”, also called “power-of-sale”, as “a foreclosure process by which … property is sold at a nonjudicial public sale by a public official, the mortgagee, or a trustee, without the stringent notice requirements, procedural burdens, or delays of a judicial foreclosure”). 

[11] Restatement (Third) of Property (Servitudes) § 6.5 (Council Draft No. 8, 1997) [hereinafter Restatement].

[12] Susan F. French, Making Common Interest Communities Work: The Next Step, 37 Urb. Law. 359, 362 (2005). 

[13] Id.

[14] Id.  

[15] Gemma Giantomasi, A Balancing Act: The Foreclosure Power of Homeowners Associations, 72 Fordham L. Rev. 2503, 2515 (2004). (focusing on the law in various states regarding homeowners associations this article does not address the issue from the current economic and legal perspective and the solutions proposed are outdated).

[16] Wayne S. Hyatt, Common Interest Communities: Evolution and Reinvention, 31 J. Marshall L. Rev. 303, 342-343 (1998). 

[17] Id. at 343-344.

[18] Id.

[19] Paula A. Franzese, Common Interest Communities: Standards of Review and Review of Standards, 3 Wash. U. J.L. & Pol’y 663, 667 (2000).  

[20] Giantomasi, supra note 15, at 2515. 

[21] Wasserman, supra note 8.

[22] Id.

[23] Board of Directors of Olde Salem Homeowners Ass’n v. Secretary of Veterans Affairs, 226 Ill.  App.3d 281, 288 (1992); Inwood North Homeowners Ass’n Inc. v. Harris, 736 S.W. 2d 632 (Tex. App. 1987). 

[24] Donald Kuperman, Assessment Collection, in Condominium and Homeowners Association Litigation: Community Association Law 259 (Wayne S. Hyatt & Phillip S. Downer eds., 1987).

[25] Eric Berger, Homeowners Association Bill Gets OK/ Some More Stringent Requirements Unlikely to Survive Law Making Process, Houston Chronicle, May 16, 2001. 

[26] Giantomasi, supra note 15, at 2532.

[27] Id.

[28] S.B. 699, 1999 Leg., 76th Reg. Sess., § 207.125(b) (Tex. 1999) at http:// www.capitol.state.tx.us/tlo/76R/billtext/SB00699H.HTM.

[29] Id.

[30] S.B. 1834, 2001 Leg., 77th Reg. Sess., § 51.008(c) (Tex. 2001), at http://www.capitol.state.tx.us/tlo/77R/billtext/SB01834I.HTM.

[31] Id.

[32] Id. 

[33]  Tex. Prop. Code. § 209.009(1)(2) (West 2009).

[34] Id. at § 209.011(b). 

[35] Terrence Stutz, Texas Amendment Would Prohibit HOA Foreclosures, Dallas Morning News, February 28, 2009. 

[36] Id.

[37] Id. 

[38] Niki Zupanic, Keeping Homes off the Auction Block: California Limits Foreclosures by Homeowners Associations, 37 McGeorge L. Rev. 199, 200 (2006).

[39] Id.

[40] Daniel Yi, Homeowner Groups' Power to Foreclose Is Under Attack
Lawmakers say boards have gone too far by seizing and selling units over minor disputes,
Los Angeles Times,
June 7, 2004.

[41] Jim Wasserman, Bill Advances to Limit Power of Homeowner Groups to Take Houses, Dailey Breeze, March 30, 2005. 

[42] Zupanic, supra note 36, at 202.

[43]  Cal. Civ. Code. § 1367.4 (b) (West 2009) (hereinafter referred to as Chapter 452).

[44] Id.

[45] Id.

[46] Id.

[47] Id.

[48] Id. at § 1367.4(c)(2). 

[49] Id. at § 1367.1(c)(1).

[50] Id.

[51] Frankie Sue Del Papa, Rules for Homeowners Associations, 9-MAY Nev. Law. 10 (2001). 

[52] Id. 

[53] Id. at 11.

[54] Id. 

[55] Id.

[56] Id.  See also Michelle Crouch, New Law to Limit Power of Neighbors: Rules would make foreclosure more difficult, limit some fees, Charlotte Observer, August 22, 2005.  North Carolina legislature passed a similar bill that would reduce the maximum fines assessed by association from $150 to $100 a day and will cap late fees for association dues unless the rules state otherwise.  Id.  

[57] Id. at 11-12.

[58] Collins, supra note 6. 

[59] Giantomasi, supra note 15, at 2540.

[60] Zupanic, supra note 34, at 204.

[61] Id.

[62] Id.

[63] Giantomasi, supra note 15, at 2537. 

[64] Franzese, supra note 1, at 336. 

[65] Frankie Sue Del Papa, supra note 49, at 10. 

[66] Chapter 452, supra note 43, at § 1367.1(c)(1).

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