The business of collecting outstanding HOA dues is often fraught with roadblocks. Payment promises are routinely broken, checks bounce, debtors are self-employed or frequently change jobs making wage garnishments ineffective, and bank garnishments often yield pennies on the dollar compared to the cost of issuance and service of the writ. If you are a board member or a community manager, you are likely familiar with the array of most commonly utilized collection methods, but you may not be familiar with receiverships. A receivership is a fantastic collection tool for recouping funds owed to an association and, when all the stars align, works like a charm to bring in funds. You may be wondering if this is such a great option, why isn’t it used more frequently? As with every great tool, there is a catch – or several in the case of receiverships.
The biggest impediment to receivership is that it is only available if the property is not occupied by the owner; it can be vacant or occupied by a tenant. If the owner is deceased and the spouse is the occupant, given the intricacies of probate, foreclosure may well be a better collection option. If it is determined that the property is vacant or tenant-occupied, the receivership process can begin.
Receivership involves the appointment of a receiver by the court. The receiver acts as a property manager in that he/she manages the property, may change the locks, turn on or off utilities, place a tenant in the property, collect rent, deal with maintenance issues, and remit funds to the association – all with court approval. The idea is that the receiver remits rent to the association to pay assessments as they are incurred and to make a payment toward arrears owed. In theory, this should be an easy process. However, some county courts have advised that their authority to appoint a receiver is discretionary and will not do so, despite the provision of the Colorado Common Interest Ownership Act (38-33.3-316(9)) that provides for a receiver to be appointed in any action by an association to collect an assessment or to foreclose a lien for unpaid assessments. On the other hand, Rule 66 of the Colorado Rules of Civil Procedure, which governs district court actions, permits a court to appoint a receiver in conjunction with collection action, including foreclosure, or as a “stand-alone” action.
To proceed under Rule 66, the association must sufficiently establish an interest in the property, that the property is in possession of an adverse party, and that the property or rents are in danger of being lost or impaired.
Even with the rules and statutes in the association’s favor, as well as the court’s ability to appoint a receiver ex parte (without notice to the owner), the appointment of a receiver has become increasingly difficult. Courts are frequently requiring that an owner be served with the summons and complaint and be provided an opportunity to respond before they will appoint a receiver. As you may have guessed, locating an absentee owner can be more difficult than trying to find a white glove in the snow.
When all the obstacles have been overcome and the order appointing the receiver has been issued, the next phase of the receivership can commence. The receiver will visit the property to determine the next actions. If the property is vacant, an inspection is conducted, and the locks changed. If the property is in rentable condition, the receiver will advertise the property and secure a tenant. However, if the property needs works, such as carpeting cleaned or replaced, cabinets or countertops repaired or replaced, or obvious water leaks repaired, the receiver will confer with the association, generally through counsel, to determine if the association wants to proceed with the repairs or terminate the receivership. The receiver will not advance any monies. If the association advances funds for repairs, a lien will be placed by the receiver on the property and collected through the rent proceeds. The advanced funds can also be placed on the owner’s ledger. If the property is occupied by a tenant, the receiver will have the tenant divert the rent payment to the receiver based on the court order.
If the tenant refuses to do so, the receiver will typically evict the current tenant and then secure a new tenant.
Once the rent starts flowing to the receiver, the magic begins! The association will receive monies to pay the delinquent balance and keep assessments current. The receiver is paid any incidental expenses, such as postage, and his/her fees from the rent. The receivership can continue until the association is paid in full.
The owner may contact the receiver to pay the past due balance as it seems that interrupting someone’s revenue stream is a big attention-getter. An owner may also list the property for sale during a receivership. The receivership is not affected unless the property is sold. Once the association is fully paid, the receiver is discharged from his obligations by court order. As discussed, although a receivership can be somewhat onerous to establish, a successful receivership is a fantastic collection tool and well worth the effort.
Please do not hesitate to contact an Altitude attorney at 303.432.9999 or at [email protected] with any questions regarding this article.