IOUSome of the most uncomfortable conversations that condo directors, managers and lawyers have with unit owners take place when owners cannot afford the monthly common expenses for their unit. While it is natural to show compassion to someone in trouble, significant problems and potential liabilities arise by delaying prompt collection action.

Ontario condominium corporations have one the strongest statutory debt collection mechanisms in the world. They can collect every single penny of common expenses in priority to most other creditors so long as the required notices are properly completed, given on time and a certificate of lien is registered on title within 90 days of default. The rules are fairly simple but the slightest slip in the paperwork or missing a deadline by a single day jeopardizes the condo’s priority and ability to collect the entire debt quickly.

Strict compliance with the relevant Condo Act provisions and maintaining the condo’s priority over the debt is important since mortgagees carefully scrutinize the lien documents and amounts. They also routinely refuse to pay arrears that fell due 90 days before registration of the certificate of lien. Collecting those older common expenses becomes nearly impossible if the owners have inadequate income and insufficient equity in the unit to pay common expenses, after first deducting outstanding property taxes, the mortgage debt and the bank’s legal costs. This gives rise to unfortunate but avoidable situations where condo boards must write off what should have been “easy money in the bank,” prompting questions as to what went wrong and who should make up for the shortfall.

When losses occur from intentionally choosing not to commence the condo lien process, whether out of pity for a cash-strapped owner or otherwise, the decision is not only negligent, it is a breach of a statutory or contractual obligation. For one thing, it is unfair to collect expenses from most but not all owners. Second, nearly every condominium’s by-laws specify that the board has a duty to collect common expenses. Third, most condo management agreements delegate common expense collection to the manager.

For breaching their duties and obligations, directors or managers who choose to delay collection and allow debts to become un-collectable are responsible to pay damages to the corporation for that failure. Knowing this would prompt most directors and managers to think twice before agreeing to delay the condo lien process.

Now, with these considerations in mind, how should condo directors and managers handle pleas from unit owners experiencing financial difficulty?

A simple but effective solution is to enact a collections policy that establishes, first and foremost, that all common expenses will be secured with a lien within 90 days of the first default, no matter what the circumstances, so as to preserve the condo’s priority. This helps clarify owners’ obligations, ensures fair treatment, creates a predictable system for dealing with any scenario that may arise and provides an instant, credible answer for directors and managers faced with requests for extensions by unit owners.

A collections policy helps minimize awkward encounters with unit owners in financial trouble. It allows directors and managers to be sympathetic to the owner’s circumstances while offering a valid explanation why the board cannot make seemingly arbitrary decisions that could potentially impact that owner’s finances but which would also amount to a breach of the directors’ duties. Such explanations could include:

“The Condominium Act and the corporation’s collection policy require a lien to be registered by no later than 90 days of the first default. We have no discretion to vary that deadline. It’s the law.”

“Management has a contractual duty to register a lien to secure all arrears within the 90-day statutory period. We have no discretion in this regard.”

“The policy must be applied uniformly to be fair to everyone, including the owners who pay in full and on time.”

“If the lien is not registered in time, then I (or the board or the management firm) must pay those common expenses to the corporation. Someone needs to pay.”

Condo managers facing a board hell-bent on allowing an owner’s debt to age beyond the 90-day lien deadline can use these explanations to point out that the board really has no input in the matter and that the manager has no choice if the management agreement requires liens to be registered within the statutory time frame. The manager’s failure to use the lien process is arguably a breach of contract giving rise to damages. If the board isn’t willing to personally front the cash to make up for the defaulting owner’s debt, why should the manager?

A collections policy also provides an effective cure for persistent late-payers who wreak havoc with the smooth administration of the collections process. The policy can provide that owners who pay common expenses late for three or six straight months or six times in any 12-month period or who are liened twice in a 12-month period will thereafter be liened within 30 days of any future default, after being given a friendly notice on the fifth day, rather than the usual 90 days after default. Contrary to popular belief, the Condo Act does not require the certificate of lien to be registered on the last possible day, so it makes sense to remove the incentive for owners to be tardy.

Where the general by-law allows some discretion as to interest on arrears, the policy can specify an interest rate greater or less than the default rate specified in the corporation’s by-laws, and can also provide a mechanism for the board to specify a lower rate or no interest in appropriate cases. This is a sensible way for the board to exercise discretion in cases of extreme hardship.

With prompt automatic debt collection procedures and steep interest rates, most owners learn their lesson after being liened once or twice and choose to reassess their finances, reorder their priorities or conclude that they are living beyond their means and take appropriate action. Though it may sound heartless, remember that condominium corporations are not in the business of lending money to their unit owners. Letting common expenses go unpaid is the equivalent of giving a loan and is unquestionably improper and unfair. Lax collection procedures allow owners to finance their lifestyles at the expense of their neighbours and invite owners to adopt haphazard payment habits. This eventually leads to financial chaos.

It is unfortunate when unit owners have difficulty paying their common expenses, especially after job loss, illness or death of a breadwinner. Given that choppy economic conditions will continue for the foreseeable future and interest rates will begin to rise and place greater strain on household budgets, condo boards and managers must be ready to deal with the inevitable increase in difficult collections cases. Enacting a collections policy that mandates fair warning and clear, automatic consequences allows directors and managers to protect themselves and the corporation as a whole.

This piece originally appeared in the August 2013 issue of CondoBusiness magazine.