June 2010

If you're considering tacking on interest charges when owners are in arrears for assessments, fines, or other fees, be sure you know whether you have the power to do that. Here's the scoop.

What's Your Authority?

As with so many policies at homeowners associations, your first question must be whether you have the authority in your governing documents and under your state law to charge interest on unpaid fees.

"Your authority is going to be based on a combination of your governing documents and state statutes, and the laws will vary state by state," explains Debra A. Warren, principal of Cinnabar Consulting in San Rafael, Calif., which provides training and employee development services to community association management firms and training and strategic planning sessions for association board members.

"Some states have much more developed condominium and homeowners association acts that specify that you can collect interest, and they set the prevailing rate," says Elizabeth White, a shareholder and head of the community associations practice at the law firm of LeClairRyan in Williamsburg, Va. "Some even specify that all information about collections and assessments must be in the association's bylaws."

California is among the states that regulate associations' ability to charge interest. "In California, we're allowed to charge interest on assessments, but not on other fees," says Warren. "That interest rate is capped by California law at 12 percent. So include the interest in your collection policy or amend your governing documents so you're not requiring owners to understand the statute to understand your interest policy."

Have Clear Guidelines

With any charge, the question is whether your effort will be upheld if it's challenged in court. "Courts differ a little bit, even within the same state," says White. "The main thing is to make sure the interest is authorized pursuant to, hopefully, your association's declaration by stating that the board will set the interest rate. The more you can elevate the authority, like in the declaration, and the more specific, the better off you'll be.

"We've worked with associations to amend their declarations about what they can collect or to at least authorize the board to set the amount," adds White. "You need something that gives the association authority, via the board, to determine what the interest rate is and setting the delinquency timeline in terms of when the interest kicks in. A lot of judges will say, 'Show me in the declarations where you can charge interest.'"

If you're attempting to charge interest on fees that aren't assessments, also be clear on your authority. "When you get into charging interest on fines and other fees," says Duane McPherson, the San Rafael, Calif.-based division president at RealManage, an association management firm that oversees properties in Arizona, California, Colorado, Florida, Louisiana, Nevada, and Texas, "that's a whole different animal altogether, and it depends on state law."

And your governing documents. "Any time you charge those other fees, you'll still want to know where the authority for that is," advises White. "Hopefully there's language in your governing documents that says those fees will be treated as a special assessment for the purpose of collection and that allows the association to have lien rights related to unpaid fees."

Finally, be aware of usury laws, which set the maximum interest rate that legislators consider fair. "You must worry about usury laws to make sure collective interest isn't annualized at more than an 8-9 percent annual rate," says White. "A lot of courts will award only the legal interest rate. They won't give the credit card delinquent rate of 18 percent."