How should a homeowners association or a condominium association deal with an owner who fails to pay his dues or assessments? There are three main remedies that associations have under Virginia law: (1) file a lawsuit against the owner, (2) file a memorandum of lien against the owner’s lot or unit, and (3) suspend an owner’s privilege to use certain portions of the common area or common element (we’ll address this third remedy in a future post).
Filing a Lawsuit
Associations have a right to file a lawsuit against delinquent owners, seeking a judgment for the delinquent amount. Many associations’ governing documents will also provide that the association is entitled to recover its court costs and attorneys’ fees too. In practice, some courts are occasionally reluctant to award associations the full amount of attorneys’ fees incurred in attempting to collect delinquent assessments, so the association may only be able to recover a certain dollar figure, or a certain percentage of the delinquent amount. While each court (and judge within that court) is different, it’s been our experience that in most situations, associations are usually able to recover most of the attorneys fees incurred in attempting to collect delinquent assessments.
Filing a Memorandum of Lien
Virginia law grants associations the right to file a memorandum of lien against an owner’s lot or unit for delinquent assessments. For a property owners’ association, the memorandum of lien may encompass any delinquent assessments dating back 12 months. For a condominium association, the memorandum of lien may encompass any delinquent assessments dating back 90 days. While a memorandum of lien does not grant an association as many collection rights as a judgment obtained pursuant to a lawsuit, the memorandum of lien may lead to the association receiving payment when a lot or unit is sold or foreclosed upon, assuming that there is sufficient equity to satisfy the memorandum of lien.
Lawsuit or Memorandum of Lien: Which Option is Best?
Filing a lawsuit and a memorandum of lien are not mutually exclusive options; rather, an association can simultaneously pursue both remedies. If an association elects to file suit against a delinquent owner, it would be prudent for the association to also file a memorandum of lien. A memorandum of lien can be recorded in a shorter amount of time than it takes to obtain a judgment, and therefore having a recorded memorandum of lien (compared to not having a judgment) places the association in a more advantageous collections position in certain situations such as an owner suddenly moving or filing bankruptcy.
Associations should consistently file memoranda of liens (plural of "memorandum of lien") in every situation where an owner is delinquent. The cost to do so is small, and the potential for an eventual recovery is sufficiently high that it would be an imprudent business practice to fail to do so (it could also arguably be a breach of a director’s fiduciary duty to fail to ensure that his association consistently files memoranda of liens). Before an association can file a memorandum of lien, the association is required by statute to provide an owner with a notice containing specific language that puts him on notice that a memorandum of lien will be filed if the owner does not bring his balance current.
The decision as to whether to file a lawsuit may require more thought in certain scenarios. Large scale associations with assessments in the higher range will likely find that it is almost always advantageous to file a lawsuit for delinquent assessments. For smaller associations with lower assessments, the decision may be more debatable, since the legal fees related to filing the suit may be less likely to be offset by an eventual recovery than in a scenario where an association files suit for a larger amount. Smaller associations may decide that they would be best served by waiting several years to file suit against chronically delinquent owners, so that they could sue for several years worth of delinquent assessments in one lawsuit, while keeping in mind the statute of limitations of five years (under this scenario, the association would want to ensure that it still regularly filed the memoranda of liens against the lot or unit).
Because the collections process involves a variety of strategic decisions about the best way to attempt to recover delinquent assessments, associations should work closely with their legal counsel to craft a collections strategy (and outline such in a written collections policy) and then ensure that they closely adhere to the policy.