Condo Law Watch

Pitfalls of Accepting Partial Payments From Owners in Collection

Being served with notice of a filed court collection action from an association’s attorney usually motivates a delinquent unit owner to pay past due assessments. It is often at this point that the owner realizes that he/she not only owes the unpaid maintenance assessments, but also the additional court costs and legal fees. In an effort to avoid paying these costs and fees, owners frequently mail a check for the unpaid assessments straight to the association or its property manager. This article will focus on questions concerning whether an association should accept such payments and the factors and potential risks and problems associated with accepting “partial” payments.

The collection process begins with what is called a “collection letter,” advising the unit owner that they have a delinquent balance, the amount of the balance, and how quickly the owner’s account may be brought current with little added legal expense. At this stage, an association’s attorney will likely have performed two tasks – neither of which is very expensive. The first is a search to confirm the name of the owner of record (to make sure the collection letter reaches the correct responsible party) and the second preparing the collection letter itself. In fact one of the reasons attorneys work to keep the cost of collection letters down is to give delinquent owners a fast and inexpensive way to cure the payment problem before the matter is escalated to the sending of a legally required notice and demand for possession.

If the account balance isn’t paid within a month or so after sending a collection letter, the third step is to send a demand for possession that requires payment within 30 days (a 30-day notice) in order to prevent court action. A key feature of every 30-day notice is a statement required under the Forcible Entry and Detainer Act (the Forcible Act) that “only FULL PAYMENT of all amounts demanded in this notice will invalidate the demand, unless the person claiming possession, or his or her agent or attorney, agrees in writing to withdraw the demand in exchange for receiving partial payment.” This notice period provides unit owners a last chance to pay the balance before a lawsuit is filed.

If the amount demanded is not paid in full before the 30-day period expires, the court obtains jurisdiction over the unit owner and gives the association the legal authority to file suit. However, even though the notice requires full payment, some unit owners may still submit payment for less –such as a payment leaving out the legal costs and fees that the notice is required to state. How an association or its property manager proceeds next may spell the difference between an association recovering all of the delinquent assessments and legal charges or an association being on the hook to pay those legal charges (and subsequently passing the expense to dues-paying members).

Tressler recommends that our clients not accept any partial payments that an owner may remit after the owner’s receipt of the 30-day notice, and instead send them back. If a partial payment is returned, one of two things typically occurs: the unit owner will remit full payment to avoid suit, or an association’s attorney proceeds to court to present evidence to the judge that the defendant owes unpaid assessments plus costs and legal fees incurred to collect unpaid assessments. If the owner pays the full balance, the association recovers everything that is owed. If the association proceeds in court, the chances of obtaining a judgment for the full balance, including legal costs and fees (and the right to evict) is greater when the partial payment has been returned to the owner. However, if an attorney still proceeds to file suit after receiving a partial payment, it is likely that the association will only recover a portion, if any, of the legal costs and fees based on the factors judges consider under the Forcible Act. Whether or not this is a fair ruling to the association is beside the point, since there is no effective means to challenge a judge’s ruling denying or reducing fees.

Further, based upon Tressler’s weekly experience in various courtrooms, the likelihood of obtaining an award of fees in such cases varies from judge to judge. If a judge declines to award legal expenses, the expenses must be written off of the owner’s account and cannot later be collected. As a practical matter, we may find it best to recommend not filing suit when only unpaid legal expenses are left. The fact that the association technically has a right to sue to recover those expenses may not help the association if the judge for that case is known for limiting fee awards based on the amount of unpaid assessments sought.

While our advice to return partial payments is easy to follow when the payment comes via a check directly to the board or manager in the mail, it may be far harder to follow when association members make payments electronically or through a payment drop, or “lock box.” In those cases, best practices call for the association or manager to intercept attempts to make partial payments as early as possible and to reverse or return payment un-deposited. This is especially important where a partial payment bears a written note that it is “payment in full,” or words to that effect. If a check with such a “restrictive endorsement” is deposited, the association is bound by it.

Associations with direct deposit or lock-box capabilities can best protect themselves from a partial payment situation by creating the means to place a “hold” on an owner’s ability to deposit directly, or place a hold on processing any payments made via the lock-box. If such holds are not possible, it becomes increasingly important that every payment submitted be posted as quickly and as accurately as possible. Currently a number of accounting software products are available that allow both account holds and same-day uploads of payments received, so that those payments can be reflected in owners’ ledgers even before paper payments have been fully processed. In that way, the association’s attorney will have an accurate depiction of payments tendered upon so that the attorney can advise the client on filing or proceeding in a collection suit.

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