Avoiding the Litigation Nightmare
February 1, 2008
Ask any board member, property manager, insurance agent or attorney what is one of the most important legal concerns for any community association and the answer will likely be unanimous… AVOID LITIGATION.
Any board that has found itself in the midst of protracted litigation knows all too well the reason for this sentiment. Litigation is costly, time-consuming and often results in neither side getting what it wants. Not to mention the fact that community associations are where we live. It's just not enjoyable being embroiled in litigation with one's neighbor.
In an effort to avoid litigation, boards need to be aware of several pitfalls that are ripe for controversy and an ever-increasing source of community association litigation:
1. Failing to disclose potential special assessments to condominium purchasers: The Illinois Condominium Property Act requires the board of directors of a condominium association to provide a statement of any capital expenditures anticipated by the unit owner's association within the current or succeeding two fiscal years. Unit owners are requesting, with more frequency, the inspection of association documents, and new owners are becoming very cognizant of their disclosure rights and association responsibilities.
Boards and managers should err on the side of disclosing too much information rather than withholding or filtering information.
2. Loss of insurance benefits due to late notice of potential claims: Over the past several years, community associations have been pummeled by the ever-rising cost of insurance coverage. In an effort to insure that coverage will not be cancelled and that rates will not increase, many associations and property managers are reluctant to submit claims to the association's carrier for a variety of reasons.
Some associations delay in submitting claims while they investigate other sources of insurance coverage before putting the association's carrier on notice, which often leads to several months delay. Others refrain from tendering a claim because the estimated loss will not exceed the association's deductible, but, in fact, the actual repair costs are higher than anticipated.
By delaying notice for any reason, associations may be unintentionally waiving insurance coverage.
A recent development in Illinois case law stresses the urgency for timely notice to insurance carriers of any potential claim. The case of Country Mutual makes it very clear that late notice provisions are enforceable as a condition precedent to insurance coverage in Illinois and lack of prejudice to the insurer is irrelevant.
3. Trickle down effects of rising consumer debt and a slowing real estate market: Over the last two years, the real estate market has seen substantial increases in inventory in all forms of ownership in community associations including new construction condominiums, condominium conversions, townhouse and single family home developments. Of course, the market increases have been fueled by an economy that provided ample, reasonable sources of financing.
With the slowing of the economy and the real estate sales market, the adverse affects of over leveraged financing are becoming quite clear. Many associations are forced to deal with owners who just cannot afford to their pay their assessments or mortgages. Under these circumstances the association must be vigilant in collecting assessments, responding timely to foreclosures and monitoring owner bankruptcies. Failing to do so often results in the association assuming the financial problems of its owners as an association common expense. The first step for any community association is to issue a demand for payment demanding the owner to pay all delinquent assessments within 30 days plus attorneys' fees and costs associated with issuing the demand if allowed by the declaration or Illinois law.
If the full amount of the demand is not paid within 30 days, most declarations (for a community association) and the Act (for condominium associations) allow the association to file a lien against the unit and/or a Forcible Entry and Detainer complaint (eviction lawsuit) seeking possession of the unit and a judgment for unpaid assessments.
At trial on a forcible complaint, the association seeks possession of the unit and a judgment for unpaid assessments, late charges and attorneys' fees. If judgment is entered, the board can enforce the judgment by evicting the owner, collecting rents from an existing tenant (if applicable) and/or seizing assets of the delinquent owner in the amount of the debt.
Additionally, if a unit owner is delinquent with the payment of his/her assessments, it usually follows that the owner will soon become delinquent with his or her mortgage. When associations are named in the foreclosure complaint, the association should file an Appearance, Answer and Counterclaim in the foreclosure action asserting the association's claim for any unpaid assessments.
The association is generally entitled to any proceeds of a foreclose sale after payment to the first mortgage holder (surplus funds). If there are no surplus funds, the association cannot collect the unpaid assessments against the unit. Thus, it is all the more reason the board must be diligent in monitoring delinquent assessments and protecting the association's rights before a foreclosure is filed.
The changing economy requires associations and managing agents to be vigilant to insure that the association's finances are secured by the prompt collection of all assessments before foreclosures or bankruptcies are filed.
Filed under: Community Association
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