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Mark Makower	In the course of running a Condominium Association, various charges may be provided by the Condominium Documents to be assessed against or posted to the accounts of co-owners who are either delinquent or in violation of other provisions of the Condominium Documents. These charges are variously referred to as interest, late fees, fines, and attorney's fees. Many times we find that due to procedural errors, or because the lack of understanding of the uniqueness of each type of charge, the charges become subject to legal objection as being excessive, constitutionally invalid, unreasonable or in violation of statute. For these reasons, it is important that Boards and managers understand the nature of each of these charges, the legal requirements for validity, and the proper procedures that must be followed in order for these charges to be enforceable. The following discussion should be helpful as a guide to ensure that those charges which you assess against co-owners are enforceable. There are two main enforcement categories facing all Associations from which these charges flow. The first is in the area of collection of delinquent assessments. The second is in the area of enforcement of behavioral based restrictions contained in the Condominium Documents, including the Bylaws and Rules and Regulations. Common to both areas are attorney's fees and potentially, fines. Specifically related to the collection of delinquent assessments are interest and late fees. I will discuss these first. The right to collect interest is generally stated in the Condominium Bylaws. For the most part, Condominium Documents in this State either refer to a 7% per annum rate of interest, or interest at the highest rate allowable by law. Interest is defined as "the compensation allowed by law for the use or forbearance or detention of money". In other words, it is the compensation payable to a party for the time during which he or she does not have money that they would otherwise be entitled to. This is also referred to as "lost investment income". In Michigan, as in most states, permissible rates of interest are set by statute. These limitations are referred to as the "usury laws". Since interest on a condominium assessment is not generally considered by the Courts to be a commercial transaction, the usury limit for the rate of interest is currently set by statute at 7% per annum. Consequently, as this time, whether the Bylaws state 7% per annum or the highest rate allowable by law, the terms are synonymous in meaning. This will hold true until and unless the usury limit is raised by legislative action. The most serious mistake made by Boards of Directors is misinterpreting the meaning of 7% per annum. This does not mean you can charge 7% of the delinquent amount each month that it is delinquent. This means instead that interest must be figured at the rate of 7% based on a 365 day year. That means each missed assessment would accrue interest at the rate of .0001917 for each day it is delinquent from the date it is due until the day it is paid. Since each individual assessment has a separate due date, individual calculations must be applied to each single assessment. In the case of a $200.00 monthly assessment, this would amount to only $1.15 for each 30 days that the delinquent assessment is outstanding. It is because we are dealing with such small sums of money that interest is frequently not charged on a monthly basis due to the administrative cost of keeping these records. Generally, interest is only charged once accounts get into foreclosure, and the outstanding balances justify the imposition of this charge. The important thing to note under the Michigan usury statute is that if interest is calculated and charged improperly, all interest is lost, not just that portion which is usurious. It is therefore important that Associations and their managers properly calculate interest if the same is being charged. Late fees are either specifically mentioned in the Condominium Bylaws, or are usually enacted as a duly promulgated Rule and Regulation of the Association. The latter is specifically authorized by Section 106(c) of the Michigan Condominium Act (MCL 559.206(c)). Late fees are generally stated as a fixed dollar amount, or some percentage of the assessment which is delinquent. Late fees are usually imposed after expiration of a certain stated grace period after the assessment is due. If properly established, late fees are distinguished from fines as not being penalties, but instead, being reimbursement for reasonable administration expenses incurred by the Association as a result of the delinquency in question. By this very limitation, late fees are viewed under a reasonableness standard and cannot exceed that which reasonably compensates the Association for its administrative costs. When late fees are found to exceed this reasonable standard, they are deemed to be penalties and will be treated the same as fines, which will be discussed below. It is important, therefore, that the Association not get greedy with its late fee if it also wishes to assess fines as a separate penalty for non-payment of assessments. It is also important to note that if a late fee is deemed to be excessive, and therefore a penalty, the enforceability of the late fee as a penalty will be subject to the same legal requirements as fines to be discussed below. Absent legal action against a co-owner, or alternative dispute resolution procedures, the imposition of fines stands as the only other remedy that an Association has to punish violations of the Condominium Documents, other than in assessment collection proceedings. As mentioned above, in addition to interest and late charges, fines can also be imposed upon delinquent co-owners, provided the Condominium Documents so state. Fines are designed to be a penalty. They are meant to deter conduct in violation of the Condominium Documents. In most cases, the Condominium Bylaws will contain provisions expressly setting forth the authority of the Association to fine, a fine schedule, and the procedures for levying fines. In other Condominium Documents, the reference may be cursory, leaving it to rules and regulations to establish procedures and fine amounts. Again, by virtue of Section 106(c) of the Michigan Condominium Act, fines may be established by rules and regulations even if no provision is made in the Condominium Bylaws. Due to the fact that fines are indeed penalties, much the same in nature as a municipal penal code, strict legal requirements must be followed for fines to be enforceable. These are often referred to as "due process" requirements. I have found that most errors made by condominium associations and their managers relate to ignoring the strict legal requirements and procedures necessary for fines to be enforceable. Distilled to their very basic elements, due process requirements consist of notice and the opportunity to be heard. As in penal codes, the violator is presumed innocent until proven guilty. This creates an important timing element which is often overlooked or blurred by Associations and their managers. Far too often, we see violation notices that go out notifying a co-owner of which restriction or rule they have violated, indicating that they can request a hearing before the Board, and if they do not, a fine of whatever level will be levied against their account. In fact, most violation notices we have seen are of this sort. It is this writer's opinion that such notices are not sufficient and would render the fine unenforceable. There are two main reasons for this. First, such a notice presupposes guilt. By its terms, unless the alleged violator requests a hearing before the Board, a fine is levied. This is not allowed under the concepts of due process. Assuming a co-owner does not request a hearing, the Board or its authorized committee must still convene and determine that the available evidence is sufficient to establish a violation. Only after the Board of its committee decides that the evidence is sufficient to establish a violation may a fine be levied. Consequently, it follows that the imposition of the fine must happen either following a requested hearing or upon the Board or committee convening and deciding that a violation has been committed after the time for requesting a hearing has passed. The second problem with this type of notice relates to the holding of a hearing. While the common law requires only an opportunity for a hearing, the specific language of the Michigan Condominium Act requires more. The provisions of Section 106 (c) of the Michigan Condominium Act state: "A default by a co-owner shall entitle the Association of co-owners to . . . other reasonable remedies the Condominium Documents may provide, including but without limitation, the levying of fines against co-owners after notice and hearing thereon". This language arguably makes a hearing mandatory. Whether the co-owner shows up and presents evidence in defense, or is found in default for failure to appear, is immaterial. The fact is that this language of the Act can be construed to require that the Board establish a hearing date and notify the co-owner of such. Given this interpretation, a notice which allows a co-owner to request a hearing within a given period of time does not suffice. It is for these reasons that we recommend to Associations that they issue two separate notices. We have attached samples to this Article. <a href="http://www.communityassociations.net/articles/NOTICE OF VIOLATION.pdf">The first notice</a> should state with specificity the conduct giving rise to the violation of a restriction or rule contained in the Condominium Documents, and specificity regarding which rule or restriction has been violated. The same notice should indicate the date, time and place of the hearing and put the co-owner on notice that they may provide evidence in defense of this alleged violation, or if they do not appear, that they will be considered in default, after which time the Board will make a decision as to the existence of the violation and the fine to be levied. <a href="http://www.communityassociations.net/articles/NOTICE OF FINE.pdf">The second notice</a> should be sent after the hearing and indicate whether a violation has been established, indicate the fine that has been levied, and indicate when payment of that fine will be due. It is my opinion that unless the Association follows the two notice procedure, it will by necessity be in violation of the provision of the Condominium Act, and any fine levied may be unenforceable. In addition to using proper procedures, it is important that the Association not neglect the adequate notice requirement. As stated above, the notice of violation must be specific both as to the acts constituting the violation and the restrictions or rules which have been violated. The law requires that sufficient detail be given to put the alleged violator on notice of exactly what he or she is being held responsible for. Any vagueness in the notice will also render the proceeding, and any subsequent fine, unenforceable. The final category of charges to be collected when the Condominium Documents are violated is attorneys fees. Under last year's amendments to the Michigan Condominium Act, Courts are now obligated to award attorney's fees to prevailing Condominium Associations in accordance with the provision contained in the Condominium Documents. It is therefore important to make sure that your Condominium Documents require the award of attorney's fees, rather than leave the award up to the discretion of the trial Judge. Most Condominium Documents drafted prior to the beginning of last year contain provisions leaving the award of attorney's fees to the discretion of the trial Judge, at least in cases involving violations other than assessment collections. The vast majority of Condominium Documents do contain provisions which allow the Association to assess co-owners the costs incurred in the collection of unpaid assessments. Due to this language, the attorney's fees involved can be assessed directly to the account without a determination of a court of law. The same is not true for attorney's fees incurred in pursuing violations of the Condominium Documents other than collection of assessments. Even if your documents have been conformed with the amendment provisions, such that the Courts must award attorneys fees in cases of violations, you still are not allowed to add these charges to a co-owner's account until they are decreed by a court of law. While this distinction is often understood by management companies, it is many times lost upon directors. It is important to note, however, that amendments may be necessary to your documents in order to provide for the mandatory award of attorneys fees when the Association is successful in pursuing violations, and equally important that attorneys fees not be assessed against co-owners in violations other than collection of assessments, until such time as they have been ordered by a court of law. To do so prematurely would make them unrecoverable. A thorough understanding of the differences between the various charges to be collected for violations of the Condominium Documents, and the legal requirements for their enforceability, is necessary for an Association to obtain the full benefit of its enforcement powers. Missing any key step may render the charge unenforceable and uncollectible. Following this guide should enhance the Association's ability to effectively and efficiently enforce the provisions of the Condominium Documents. © Copyright 2002 Mark F. Makower All rights reserved.
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Make Sure Your Enforcement Charges Are Collectible