NC Bill to Restrict HOA/Condo Collections Would Harm Associations & Owners

Posted on April 26, 2023 by Jim Slaughter

https://blog.lawfirmcarolinas.com/bill-to-restrict-hoa-condo-collections-would-harm-associations-homeowners/

As described in my recent NC Community Association Legislative Update, one bill moving through the NC General Assembly is HB 542 “Protect Homeowners’ Rights.” In addition to placing further requirements on associations as to the collection of past due assessments, the proposal would prohibit the filing of a lien against an owner who fails to pay obligatory association assessments unless the amount is $2,500 “or one year of unit owners’ association assessments, whichever is lesser.”

The bill’s attempts to add protections to owners not paying obligatory dues may be well intentioned, but such a dollar cap before a lien can be filed will almost certainly harm all other owners in the association. The association’s expenses do not stop, even if assessments can’t be obtained from certain owners.

NOTE: This is not a bill to prevent foreclosure unless the owner owes $2,500 or one year of assessments–it prevents all even the filing of a lien on the non-paying owner’s property.

While a $2,500 or one-year minimum threshold before assessments can be collected might seem reasonable and charitable to owners, it would almost certainly harm associations and other owners due to the following:

Given varying costs of living, assessments tend to be lower in North Carolina than in bigger, more expensive states or northern cities. We have associations with few amenities and limited common area or possibly just insurance on common elements or an entrance sign to maintain. It would take YEARS for owners to accrue $2,500 in assessments. North Carolina is not a super lien state (many states have a provision that if a mortgage is foreclosed, the bank must pay the association so many months of assessments). As a result, in North Carolina the lot could be sold or the property foreclosed upon long before the association could go after the funds.
To not even be able to file a lien will mean that owner’s assessments will likely be lost. The property will get sold free and clear or a mortgage will foreclose and all assessments will be lost (as happens in states without a super lien statute). The sometimes-suggested alternative of bringing an actual lawsuit in the courts costing many thousands of dollars and at least a year in litigation to recover $1,000 in assessments is impractical.
From a fairness standpoint, putting in such a cap basically means that more affluent associations can go after owners, but less affluent associations will have a deficit. As an example, a downtown condominium that charges $2,500 monthly assessments would reach the limit immediately. On the other hand, we have associations where it would take five years to reach the threshold and would have to get more money from existing owners. The legislators introducing the bill may think it is pro-homeowner, but it is only pro-nonpaying homeowner, as it will certainly be negative for the 95% of owners who are paying timely and must pay more.
Dues are not less significant to smaller, less affluent associations. An association is a zero-sum game. There is no means of making up lost funds other than paying owners paying more, which may not be practical. Since the assessments may pay for items such as electricity or insurance on the common elements, those services will get cancelled.
Both the obligation for the assessments and the right to lien and foreclose are part of the contract that every owner agreed to when buying into the community.
At the end of the day, a lien for nonpayment of property assessments is much like other real estate liens, including materialman’s or mechanic’s liens. We don’t have state laws that prohibit a plumber or contractor from going after an owner for non-payment of work on the property unless it reaches a certain dollar amount. Associations should not be treated differently.
If you put a cap, such as $2,500, below which you cannot effectively pursue collections, won’t owners go into arrears just less than that? There would be nothing to do as to the owners who keep their balance at $2,499, but that expected money which is part of the budget will be lost to the association.
I’m don’t practice constitutional law, but the proposal as worded when applied to existing associations (versus future ones) seems to run afoul of the Contracts Clause of the US Constitution (“No state shall pass any Law impairing the obligation of contracts.”). Here, the State would be interfering with the existing contract of the declaration. Rather than protecting private contract rights, this proposal would void them.

HB 542 may be well intended but would have very negative unintended consequences. An overwhelming number of NC community associations have low assessments. To those owners, though, it is significant money, and they should not be forced to pick up the deficit from other owners who fail or refuse to abide by their contractual obligations.

The bill and its current status can be found at https://www.ncleg.gov/BillLookUp/2023/H542.