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Dues Acceleration - Demystifying the When, How, and Why

One of the common issues Minnesota Homeowner's Associations face is what to do with the homeowner who refuses to pay their dues. The Association has many tools to deal with this type of situation - one of which is the option to accelerate annual dues. This means that instead of having 12 equal installments of monthly dues, all installments for the fiscal year would be combined and deemed immediately due as a lump sum. This practice, when applied correctly, helps protect the Association's bottom line and encourages payment. Acceleration, however, is only authorized in certain specific situations. This article is a guide to understanding whether your association has the legal authority to accelerate dues and the proper steps to doing so successfully.

Determining Whether Your Association Can Accelerate Dues

The first step in accelerating dues is to look through the governing documents to determine whether the association is legally entitled to do so. For the answer, one only needs look to the governing documents and state law.

The Declaration

The governing documents typically contain the Articles of Incorporation, the Declaration, and the Bylaws. Of these three, the Declaration is the most likely to contain the authority to accelerate dues. The declaration is essentially a binding restrictive covenant that runs with the land. Provided that a provision of the declaration doesn't clash with the Articles of Incorporation or State Law, that provision carries the authority to dictate what a board can or cannot do.

A typical acceleration provision is contained in the assessments or the compliance subsections of the declaration. It may read thusly:

In the event of a Unit Owner's default of more than thirty (30) days of any installment of an Annual Assessment, all remaining installments of that Unit's Annual Assessment may be accelerated and shall then be due and payable in full. The Association must give at least ten (10) days advance written notice of the effective date of the acceleration shall be given to the defaulting Owner. The notice required by this subsection may not be given until after thirty (30) days past the installment's due date.

Not all declarations contain acceleration provisions. In that case, the board needs to determine if the Minnesota Statute allows it to accelerate.

Authority by Statute

The Minnesota Common Interest Ownership Act ("MCIOA") contains authority to accelerate dues. Minn. Stat. §§ 515B.3-115(h), 515B.3-1151(h). The authority comes in two statutes because each statute applies to associations created before or after August 1, 2010. Whether or not the association was created before or after this date is irrelevant for acceleration purposes - the wording is the same in both statutes:

Subject to any shorter period specified by the declaration or bylaws, if any installment of an assessment becomes more than 60 days past due, then the Association may, upon ten days' written notice to the Unit owner, declare the entire amount of the assessment immediately due and payable in full.

Id.

A default period of more than sixty days past due may be lengthened or shortened by the association's Declaration. However, once the time period of sixty days elapses, the Association must give at least ten days warning (but this may be lengthened in the Declaration) before the acceleration occurs. Thus, the statute sets a default guideline for associations which do not have an acceleration clause, and it sets a minimum notice period. However, not all associations are governed by MCIOA; If an association is a townhome or single family community created before June 1, 1994, it must "opt-in" to MCIOA through an amendment to its declaration.

So, Can We Accelerate?

Probably. To find out for sure, go through this simple step-by-step analysis:

1) Check your Declaration. Does it have an acceleration provision? If so, you can accelerate.

2) If your Declaration has no acceleration provision, is it a condominium or was it created on or after July 1, 1994? Was your Declaration amended to be governed subject to Minn. Stat. § 515B ("MCIOA")? If the answer to any of the above is "yes," move to Step 3. If the answer to either of these questions is "no," you should speak with an attorney about amending your declaration.

3) If your Declaration is silent about acceleration, but you are covered by MCIOA, double check to ensure that the governing documents don't prohibit acceleration. Provided the governing documents don't prohibit acceleration, you may accelerate.

The authority to accelerate comes from either the Declaration, Minnesota statute, or both. "Whether" your Association may accelerate dues is just one issue. The next issue is "when" it may do so. Premature acceleration can be a major pitfall in a collection methodology.

Determining When Your Association Can Accelerate Dues

Monthly Dues Are Actually One Assessment

The first concept to understand if you're determining when to accelerate dues is that monthly dues are actually only one assessment. Every fiscal year, the Association meets to determine its budget. The budget is then divided onto each Unit to determine how much each Unit is assessed in dues. That amount should be a single assessment with twelve equal monthly installments.

The first installment of the annual assessment is always the first month of the fiscal year. Most associations will make the fiscal year match the calendar year, but always double check to avoid
miscalculation.

The Trigger Event - Sixty (60) Day Delinquency

Most acceleration provisions mirror the statute which refers to a certain period of time after "any installment." Id. This means that if an installment is not completely paid (partial payments don't count) within sixty days of its due date, the acceleration clause is triggered.

Understanding when the fiscal year ends is important because only the current year's remaining installments may be accelerated. If, for example, your fiscal year runs congruent to the calendar year, you may only accelerate through December. This means that if you are required to wait sixty days after an installment is due, it would be impossible to accelerate anything past November's dues. Pragmatically, it would be unrealistic to accelerate anything later than September's dues. By the waiting period, the accelerated dues would already become due and payable by the time all of the notice requirements were satisfied.

Don't Forget the Notice Period

Another important consideration is the notice period. The requisite ten (10) day notice (or longer if your declaration specifies) should only be sent to a homeowner after the waiting period has elapsed. Pay close attention to the statute (or your Declaration), which says that acceleration may only trigger if payment is "more than 60 days past due." Id. (emphasis added). The statute requires the Association to wait until day 61 after the due date.

If the due date for an installment is January 1 (as it is for most associations) and the trigger event is "more than 60 days past due," the Association would need to count January 2 as "day one;" and then count until "day sixty" which would be March 2 (in a non-leap year). The Association could send the ten day notice out after one more day - March 3.

Once the ten-day notice is out, the homeowner must make the initial past-due payment within the ten days after the notice is sent. Make sure to be consistent in how this time is calculated. The statute does not discuss when notice is effective (when mailed, when received, etc.). Therefore, if you consider notice given when it is dropped into the mailbox, be sure to check the post-mark date of any payments mailed in to apply the same standard.

Finally, it is important to note that a homeowner only has to bring the two-month late payment current. If, for example, the Association is accelerating because January's payment was never made, and the homeowner failed to pay February and March as well, the homeowner could avoid acceleration by paying January's payment and leaving February and March's payment still due and owing. The Association, however, could re-start the acceleration process the following month.

Tying It All Together

Determine Whether You Can Accelerate.

The best way to illustrate the process from start to finish is by using a hypothetical. In our hypothetical, let's say Badger Swamp Homeowner's Association has a non-paying homeowner - Dorothy Debtor. Ms. Debtor pays her January installment, but misses her February installment. Badger Swamp's fiscal year mirrors the calendar year, and its Declaration doesn't say anything about accelerating dues. It is neither a condominium nor a post-1994 townhome. However, it did pass an amendment in 2000 electing to "opt-in" to MCIOA, and therefore has a statutory right to accelerate.

The board votes and decides in March to accelerate Dorothy Debtor's dues because she isn't paying or responding to the board's payment demands. Dorothy's missed payment was due on February 1st. The board must wait sixty days after the missed payment which would be April 2. On April 3, the Association sends a notice to Dorothy saying if she doesn't pay the February dues within ten days, her entire year's dues will become immediately due and payable.

On April 14, the payment has not been received, but the Association waits another five days until April 19 just to make sure it wasn't mailed on the tenth day. April 19th arrives and no payment is received. Without any further action, Dorothy's assessments for February through December are immediately due and payable.

Thinking Twice About Accelerating Dues

Dues acceleration can be a great tool to motivate delinquent homeowners to pay. It can also clear up the matter of dues for the remaining year allowing a foreclosure buyer the chance to live dues-free until the start of the next fiscal year. The Association has to wait six months to evict the Homeowner even after the foreclosure. If the Homeowner was renting the Unit, the tenant is entitled to one lease term beyond that six months plus ninety days' notice. Going that entire time without dues revenue is problematic and can be prevented by accelerating dues as early as possible. However, dues acceleration can also make a seemingly large debt even larger, and imposes an entire year's dues on a Homeowner who may be evicted before that year is over.

The best situation to use dues acceleration is one where there is either a hope that the threat of accelerated dues will cause a Homeowner to pay, or one in which the Homeowner has no hope of affording dues and the Association is hoping to replace that Homeowner with one who is willing and able to pay.

The other major consideration is the timing of the foreclosure. As discussed above, it is impossible in most cases to accelerate anything beyond month 11 due to the waiting and notice periods. If it is late in the fiscal year, the dues are assessable in monthly installments until the conditions are satisfied again.

The attorneys at Roeder Smith Jadin, PLLC deal with the legal issues posed by dues acceleration on a regular basis. If you are a member or manager of a Common Interest Community and you are considering accelerating dues or have a question about how to do so properly, contact one of our experienced attorneys today.

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