Q: Should our association charge a late fee on overdue assessments? Are late fees effective? What’s the most effective collection tactic?
A: Virtually all declarations permit the association to charge a late fee on past due assessments. These fees provide incentive for the owner to make timely payment as well as address the association’s added administrative expenses. Many declarations impose the obligation to charge a late fee, frequently by the use of the word shall, as in “the association shall impose a late fee” on any past due assessment. Alternatively, some declarations will substitute the word may. Regardless of the language, it is important that the board is aware of this subtle distinction and act accordingly.
In Colorado, HOAs are required to adopt a written policy regarding the collection of unpaid assessments. Additionally, the association must maintain accurate and thorough accounting records of each unit in the community subject to assessments. At a minimum, the policy must clearly communicate the consequences for failure to timely pay assessments, including:
- The due date of each payment and when payments are considered past due
- The late fees and interest that may be imposed
- Returned-check charges
- If the owner is entitled to a payment plan and how to go about making such a request
- That a delinquency notice(s) will be sent to the owner and the information contained in the notice
- That the account may be turned over to an attorney or collection agency if not corrected
- The legal remedies available to the association
A written collection policy provides sound guidance to the board of directors and community manager. Further, it provides owners with prior notice and an expectation of fair treatment. The policy should be published and made readily available to owners.
Late fees may be effective as a deterrent against late payment and may also be effective in resolving delinquencies. If an owner’s account ends up in collection, different strategies can be employed to resolve the delinquency. For example, the association may agree to waive future late fees during the course of a repayment plan. Although a decision to waive late fees is discretionary, experience has demonstrated that a willingness to negotiate can be a useful collection strategy and sound exercise of business judgment.
An issue that has recently come to light has to do with the legal concept of “waiver.” In the context of an HOA dealing with unpaid assessments, courts have ruled that if the association fails to impose late fees, when it otherwise has a right to, it may be said to “waive” the right to impose any late fee at a future date. This scenario can be seen where a board makes the conscious decision not to charge a late fee(s) on a delinquent owner only to have the matter deteriorate, leading to a later desire to impose late fees against that owner. Some courts have viewed the association’s initial decision as a waiver of its rights, thus forgoing the opportunity to change its mind. The better course of action would be to adhere to the collection policy and reserve the opportunity to credit the account once an acceptable settlement with the owner has been reached.
The amount of any late fee should also bear some proportionality to the amount of the assessment. Some state laws (and courts) do not permit penalty fees/interest in excess of a set percentage. Thus, a $50 per month late fee for failure to pay an annual assessment of $100, may be considered excessive.
At the end of the day, the best tactic for dealing with overdue assessments is adherence to a well written collection policy, accurate record keeping and effective communication with homeowners.