Enforcement of Financial Obligations In a Condominium or Apartment Ownership Scheme

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125

ENFORCEMENT OF FINANCIAL

OBLIGATIONS IN A CONDOMINIUM OR

APARTMENT OWNERSHIP SCHEME

CORNELIUS VAN DER MERWE*

LUIS MUÑIZ-ARGÜELLES**

INTRODUCTION

A person in whose name an apartment in a condominium or

apartment ownership scheme has been registered enters into a three-

fold legal relationship: he becomes the individual owner of his apart-

ment, the co-owner of the common property of the scheme, and a

member of the association of owners to whom the management and

administration of the scheme is entrusted.

Harmony in an intensified community can only be achieved if the

scheme is managed properly, and the common parts of the building

and the common facilities are maintained adequately and regularly.

Consequently, each owner is obliged to share in the provision of

funds for the management of the scheme and the maintenance of

common parts such as the outside walls, the roof, the corridors, the

structural components, recreational facilities, and the land on which

* Cornelius van der Merwe is a Professor of Civil Law at the University of Aberdeen and

a Research Fellow at the University of Stellenbosch, South Africa.

** Luis Muñiz-Argüelles is a Professor of Law at the University of Puerto Rico.

1. See Mark F. Grant, et al., Ocean Trail Unit Owners Ass’n, Inc. v. Mead: Democracy or

Tyranny–The Supreme Court of Florida Properly Finds in Favor of Condominium Board, 20

NOVA L. REV. 513, 515 (1995). The authors compare the condominium community with a de-

mocracy:

Ideally, the system should provide for sharing of many amenities in the form of com-

mon elements which the unit owners might not be able to afford individually in ex-

change for the sha ring of common expenses. In reality, however, the microcosm of

condominium government mirrors the operation of larger-scale democracies: there are

power struggles, and the governmental representatives are challenged when they lose

touch with their constituency, exceed their authority and abuse their “taxing and

spending powers.”

Id. at 530. In the United States and especially in Latin America, many condominium schemes

are so large that they surpass many small towns both in population and land value.

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126 DUKE JOURNAL OF COMPARATIVE & INTERNATIONAL LAW [Vol 16:125

the multi-unit building is erected.

These funds are budgeted for in

the annual general meeting and then divided amongst the various

owners according to share values or participation quotas.

These val-

ues or quotas are usually calculated in accordance with the size of an

apartment or determined by the developer at the outset.

The proper

maintenance, efficient management and ultimately the success of an

apartment ownership scheme will depend on a steady flow of assess-

ment funds from the unit owners to the coffers of the condominium

association. Repeated failure to contribute to common expenses may

hinder timely maintenance and efficient management and ultimately

wreck the scheme.

In some countries like South Africa, the management associa-

tion’s lack of funds has become part of a larger socio-economic prob-

lem. In order to bring home ownership within reach of the emerging

black middle class, a high percentage of mortgage credit is supplied

by financial institutions (mostly banks) in the knowledge that, quite

frequently, employers automatically credit mortgage repayments to

the account of the mortgage creditor. Unit owners are not made

aware of their obligation to pay maintenance contributions and gen-

erally do not account for it in their financial planning. The disastrous

result is that, although mortgage repayments are up to date, the ar-

rear contributions and charges remain unpaid from the outset, and

the amount of these charges increases from month to month. Conse-

quently, management associations struggle to perform their mainte-

nance and administration functions properly, unless the non-

defaulting owners are prepared to contribute more to cover the short-

falls. This financial interdependence leads to deterioration of the

building and eventually to slum conditions, and areas where financial

institutions are no longer prepared to grant loans. It is, therefore, in

the interest of associations, contributing apartment owners, mortgage

institutions, and the community at large that bodies corporate act

2. See, e.g., Sectional Titles Act 95 of 1986 s. 32(3)(c), 37(1)(a) (BSRSA 1999) (amended

1991, 1992, 1993, 1997) (S. Afr.) [hereinafter South African Sectional Titles Act]; Ley 49/1960,

de 21 de julio, sobre propiedad (B.O.E. 1960, 176) (amended 1999) (Spain) [hereinafter Spanish

Law on Horizontal Property].

3. See Cornelius G. van der Merwe, Apartment Ownership, 6 INTERNATIONAL

ENCYCLOPEDIA OF COMPARATIVE LAW, ch. 5, §§ 339, 389, 406 (Athanassios N. Yiannopoulos,

ed., 1994).

4. See id. § 141.

5. See In re Body Corporate of Caroline Court 2002 (1) All SA 49 (A) at para. 7 (S. Afr.)

(quoting Roger Green and Peter Feuilherade, Lost Property, DE REBUS, June 2001, at 18, 20).

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2006] FINANCIAL OBLIGATIONS IN A CONDOMINIUM OWNERSHIP SCHEME 127

swiftly and decisively against defaulters.

Unit owners should be

properly warned of the consequence of failure to make payments.

an owner does not pay in a timely manner, other action should be

taken to prevent the continually accruing arrear contributions from

reaching an unacceptable level.

This Article analyzes the enforcement measures or sanctions

used in various common law,

European,

and Latin American juris-

dictions

to encourage compliance with financial obligations. All of

these statutes are recent updates or replacements of older statutes.

6. See Body Corporate of Geovy Villa v. Sheriff, Pretoria Cent. Magistrate’s Court 2003

(1) SA 69, 73-74 (TPD) (S.Afr.) (“If there are a number of defaulters, the body corporate is un-

able to maintain the building in a proper condition.”).

7. See Michael R. Fierro, Note, Condominium Association Remedies Against a Recalci-

trant Unit Owner, 73 ST. JOHN’S L. REV. 247, 271-72 (1999). See also Amos B. Elberg, Note,

Remedies for Common Interest Development Rule Violations, 101 COLUM. L. REV. 1958, 1989

(2001). Elberg gives the following reasons why associations would like to enforce their rules

strictly and without discretion: “desire to maintain low enforcement costs, development of a

reputation for rigid enforcement, non-avoidance of scrutiny of complainant motivations, genu-

ine belief in the efficiency of the rule, and fear of waiver.” Id.

8. As representative of common law jurisdictions, we chose the highly developed Cana-

dian condominium statutes of British Columbia (Strata Property Act, 1998 S.B.C., ch. 43 [here-

inafter B.C. Strata Property Act]) and of Ontario (Condominium Act, 1998 S.O., ch. 19 [herein-

after Ontario Condominium Act]); the strata title statutes of Singapore (Building Maintenance

and Strata Management Act 47 of 2004 [hereinafter Singapore Strata Title Act]) and South Af-

rica (South African Sectional Titles Act, supra note 2); the progressive Uniform Common In-

terest Ownership Act [hereinafter UCIOA] (drafted in 1994 by the National Conference of

Commissioners on Uniform State Laws and approved by the American Bar Association on Feb-

ruary 14, 1995, adopted by at least 7 states as of October 2005,

http://www.nccusl.org/Update/uniformact_factsheets/uniformacts-fs-ucioa.asp); and the new

English Commonhold Act (Commonhold and Leasehold Reform Act, 2002 c. 15 (Eng.)).

9. See Law No. 65-557 of July 10, 1965, Journal Officiel de la République Fra nçaise [J.O.],

July 11, 1965, p. 5950 (amended 1966, 1974, 1977, 1979, 1985, 1986, 1992, 1994, 1995, 1996, 2000)

(Fr.) [hereinafter French Law No. 65-557]; Spanish Law on Horizontal Property, supra note 2

(Spain).

10. See Ley de condominios, No. 104 del 25 de junio de 1958 (codified at P.R. LAWS ANN.

tit. 31 §§ 1291-1294d (2005) [hereinafter Puerto Rican Condominium Law]; Ley de Propiedad

en Condominio de Inmuebles para el Distrito Federal [L.P.C.I.D.F.] [Law on Condomminium

Real Estate-Property for the Federal District], Diario Oficial de la Federación [D.O.], 31

diciembre de 1998 (Mex.) [hereinafter Mexican Law on Condominiums]; Ley 675 de 2001

[Colombian Law 675 of 2001], Diario Oficial [D.O.], 4 de agosto de 2001 (Colom.) [hereinafter

Colombian Law 675 of 2001].

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128 DUKE JOURNAL OF COMPARATIVE & INTERNATIONAL LAW [Vol 16:125

I. ENFORCEMENT OF FINANCIAL OBLIGATIONS

A. General

It is generally accepted that the inability of an association to col-

lect financial contributions from owners efficiently is the main source

of financial and personal anxiety in a condominium scheme.

This

function becomes more crucial in hard economic times; unfortunately,

it also becomes less successful.

To facilitate collection, legislation

and regulations contain enforcement measures to assist management

associations in performing their task efficiently. The discussion of

these measures will be divided into those, which can be used to force

an owner with sufficient resources to pay and those, which serve to

protect the association in cases where the defaulting owner does not

have the necessary resources to pay his contributions.

B. Measures which May Force the Financially Sound Owner to Pay

1. Enumeration of Measures. Apartment ownership statutes

contain several mechanisms to force the financially sound owner to

pay his contributions promptly. These measures not only apply to or-

dinary apartment owners, but specifically target non-resident, wealthy

owners who bought their apartments as investments and do not al-

ways bother to pay their monthly contributions. The primary en-

forcement measures are summary proceedings in court to effect swift

payment of any arrears. In addition, the owner is subjected to penal-

ties for late payment and is made liable for any interest accruing on

the arrears and the cost of collecting these late payments. Further

measures include denial of the right to vote at general meetings, sus-

pension of services, shame sanctions, recourse through tenants to

whom a unit is rented, and mechanisms to safeguard claims for out-

standing debts on transfer of a unit.

11. James L. Winokur, Meaner Lienor Community Associations: The “Super Priority” Lien

and Related Reforms under the Uniform Common Interest Ownership Act, 27 WAKE FOREST L.

REV. 353, 357 (1992).

12. Id. Federal Rules of Civil Procedure Rule 69 provides that, unless the court directs

otherwise, the process to enforce a monetary judgement shall be a writ of execution, usually by

seizing and selling the property of the defaulting owner. In England, if the sums owed are under

£15,000, proceedings can be initiated in the county courts. CIVIL PROCEDURE RULES practice

direction 7 (Eng.).

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2006] FINANCIAL OBLIGATIONS IN A CONDOMINIUM OWNERSHIP SCHEME 129

2. Summary Proceedings in Court. Most jurisdictions have to

resort to ordinary court procedures to enforce the payment of contri-

butions.

Some condominium statutes, the new English Common-

hold and Leasehold Reform Act and the Florida condominium stat-

ute, for example, require the directors of the association to assess the

desirability of using arbitration, conciliation or mediation procedures

instead of legal proceedings or to submit to non-binding arbitration

before seeking court action.

However, certain jurisdictions have introduced special summary

court proceedings for the recovery of late payments. The Spanish

statute introduced a summary procedure (proceso monitorio), which

must be authorized at the general meeting. Once authorized, the

debtor is notified of the amount claimed and furnished with a certifi-

cate signed by the chairman (president) and the secretary indicating

the amount of the debt. Unless the defaulting owner provides a bank

guarantee for this amount, the association is entitled to execute

against enough of the owner’s property to cover the debt.

Under

the Mexican statute, the professional manager is forced to act swiftly,

as he is allowed only to initiate summary execution proceedings for

late payments of up to three months, together with interest and penal-

ties.

The most effective summary proceedings are found in Puerto

Rico and Singapore. The Puerto Rican statute allows the board of di-

rectors to sue the debtor in a special proceeding devised for the col-

lection of small claims for arrears of up to $5,000. The debtor must be

notified of the claim for payment at least fifteen days before the filing

13. See, e.g., Commonhold Community Statement § 4.11.11(a) in the Commonhold and

Leasehold Reform Act, 2002, sched. 3 (Eng.); Patrick J. Rohan & John P. Healey, Home Owner

Association Assessment Litigation in New York–An Overview, 73 ST. JOHNS L. REV. 199, 199

(1999).

14. Commonhold and Leasehold Reform Act 2002, c. 15, §§ 35(3)(b), 37(2)(i); FLA. STAT.

ANN. § 718.1255 (4) (West Supp. 1993); see also Lewis A. Schiller, Limitations on the Enforce-

ability of Condominium Rules, 22 STETSON L. REV. 1133, 1168 (1993), which mentions that

comprehensive legisla tion in this area was enacted by Montgomery County, Maryland, effective

January 1, 1991. This legislation requires binding mediation or a hearing before an administra-

tive board whose decision is binding. See MONTGOMERY, MD., CODE ch. 10b (1991).

15. Spanish Law on Horizontal Property, supra note 2, arts. 21.1, 21.2, 21.5. For similar

summary execution proceedings initiated by the professional manager of the scheme for Portu-

gal, see Decreto-Lei no. 268/94 de 25 de Outubro, art. 6, Diário da República 1 Série A, Nº 247,

de 25.10.1994, 643-3; for Brazil, Lei No. 7.182, § 12.2, de 27 de marco de 1984, D.O.U. de

29.03.1984 (amending Lei No. 4.591, de 16 de dezembro de 1964).

16. Mexican Law on Condominiums, supra note 10, art. 60.3.

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130 DUKE JOURNAL OF COMPARATIVE & INTERNATIONAL LAW [Vol 16:125

of the court action.

The Building Maintenance and Strata Manage-

ment Act of Singapore authorizes the recovery of arrear contribu-

tions of up to S$20,000 in a special small claims court.

A contribu-

tion levied by the management corporation is deemed to be money

payable under a contract for the provision of services.

Unfortu-

nately, the South African statute regulating small claims courts does

not allow such claims, mainly because they only entertain claims be-

tween natural persons.

3. Responsibility of Owner for Interest on Arrears and Cost of

Recovery. In order to persuade financially able owners to pay their

contributions regularly, most condominium statutes (or provisions of

the jurisdiction’s Code of Civil Procedure) charge interest on arrear

contributions (in most jurisdictions, this can be no higher than the le-

gal interest rate

), penalties for being in arrears,

and/or collection

costs in recovering such contributions.

Under the Spanish statute, not only all reasonable legal costs, but

also the cost of all attempts to collect contributions prior to a court

case can be claimed upon the presentation of written proof. Court

costs can also be claimed, and if the action is opposed, the general

rule as to judicial costs applies, and the total cost in using legal repre-

sentation can be claimed.

The Ontario statute specifically states that

the management association is entitled to claim all expenses con-

nected with the collection or attempted collection of arrears, includ-

ing the costs of preparing and registering a certificate of lien (to which

17. Puerto Rican Condominium Law, supra note 10, art. 39 (codified at P.R. LAWS ANN.

tit. 31, § 1293c) (referring to Rule 60 of the 1958 Rules of Civil Procedure, as amended).

18. Singapore Strata Title Act, supra note 8, § 40(8); Small Claims Tribunal Act, 308 Stat.

Rep. of Singapore IX (1985) § 5(3)-(4) (1985) (Sing.) (stating that claims of up to S$20,000 are

allowed and must be brought within one year from the time the cause of action arose).

19. Singapore Strata Title Act, supra note 8, § 40(8).

20. See Small Claims Court Act 61 of 1984 § 7(1) (BSRSA 1999) (S. Afr.).

21. See, e.g., Ontario Condominium Act, supra note 8, § 85(3)(c); Puerto Rican Condomin-

ium Law, supra note 10, art. 39 (codified at P.R. LAWS ANN . tit. 31, § 1293c (2005)); CÓDIGO

CIVIL [CÓD. CIV.] § 2686 (Arg.).

22. See, e.g., Mexican Law on Condominiums, supra note 10, art. 60.

23. See, e.g., Regulations in terms of Sectional Titles Act no. 95 of 1986, Annexure 8, r.

31(6), Government Notice (GN) R664 of 8 April 1988 (S. Afr) [hereinafter South African

Model Bylaws]; Spanish Law on Horizontal Property, supra note 2, arts. 21.3, 21.6 .

24. Spanish Law on Horizontal Property, supra note 2, arts. 21.3, 21.6; see also French Law

No. 65-557, supra note 9, art. 10-1.

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2006] FINANCIAL OBLIGATIONS IN A CONDOMINIUM OWNERSHIP SCHEME 131

the corporation is entitled as soon as an owner defaults).

The South

African model by-laws include, under the heading “legal costs,” costs

between solicitor and client, collection commission, expenses and

losses incurred in the recovery of arrear levies.

In Puerto Rico, the recovery of attorney’s fees is allowed only in

cases where the debtor opposes the claim without a justifiable rea-

son.

In procedural matters, Puerto Rico has adopted the U.S. litiga-

tion pattern, which exempts the losing party from paying attorney’s

fees, except in cases where the judge rules otherwise or where the law

provides for a fixed amount in attorney’s fees. The Puerto Rican

provision also adds that the successful party may condone the collec-

tion of sums related to costs and attorney’s fees—a rule that has al-

ways existed in civil cases.

In the United States, where attorney’s fees are notoriously high,

the Uniform Common Interest Ownership Act (UCIOA) authorizes

the association to impose charges for late payment of contributions,

but does not mention attorney’s fees.

This accords with the view

that each party must bear its own costs, unless the parties have agreed

otherwise or unless the conduct of one party in bringing or defending

the action is so blatantly unmeritorious as to warrant such an award.

State statutes that do allow the recovery of attorney’s fees limit these

25. Ontario Condominium Act, supra note 8, § 85(3)(c).

26. South African Model Bylaws, supra note 23. In Barnard NO v. Regspersoon van

Aminie, the Supreme Court of Appeal confirmed the decision of the Transvaal Provincial Div i-

sion in Barnard NO v. Regspersoon van Aminie 2000 1 SA 213 (TPD) that the owner is respon-

sible for the legal cost of recovering arrear contributions including contributions more than two

years in arrears. 2001 (3) SA 973, 982D, 985D (SCA). Brand A.J.A. argued, dogmatically cor-

rectly, that, like interest, legal costs incurred in recovering a debt cannot be separated from the

debt itself but form part and parcel thereof. 2001 (3) SA 973, 981H-I (SCA).

27. Puerto Rican Condominium Law, supra note 10, art. 42 (codified at P.R. LAWS ANN.

tit. 31, § 1293f (2005)).

28. Id.

29. See THE BROOKINGS INSTITUTION, JUSTICE FOR ALL: REDUCING COSTS AND DELAY

IN CIVIL LITIGATION, REPORT OF A TASK FORCE, 1-7 (1989).

30. UCIOA § 3-102(a)(11) (1994).

31. See Fierro, supra note 7, at 267.

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132 DUKE JOURNAL OF COMPARATIVE & INTERNATIONAL LAW [Vol 16:125

to “reasonable attorney’s fees,”

which would not be the case when

fees are out of proportion to the fine or charges claimed.

In practice, the threat of having to pay the fees of attorneys em-

ployed by the management association forces the defaulting owner to

think twice before refusing to pay. An award of attorney’s fees is thus

an effective measure to obtain compliance.

4. Penalties for Late Payment. In order to promote timely

payment of contributions, some statutes contain stiff fines or penalties

for delays in payment. Thus, the Puerto Rican statute provides that

the by-laws of a scheme may charge a penalty of ten-percent interest

on a contribution that is more than 15 days overdue. In addition,

amounts not paid on the due date automatically generate interest at

the maximum interest rate. When more than three monthly install-

ments remain unpaid, the unpaid amount will draw an additional

penalty of one percent of the total debt, to be paid monthly.

The Singaporean Act makes an owner guilty of an offence if he

fails to pay any contribution or interest due within 14 days from the

date of service of a written demand by the management corporation.

The maximum fine is S$10,000 plus a sum not exceeding S$100 for

every day that the sum remains unpaid.

This sanction is considered

very effective, especially in the case of absentee landlords who do not

bother to pay the monthly contributions. However, it has little effect

in the case of indigent owners who simply do not have the money.

32. See, e.g., Colorado Common Interest Ownership Act, COLO. REV. STAT. § 38-33.3-

302(1)(k), which includes in the association’s power of recovery “reasonable attorney’s fees and

other legal costs for collection of assessments and other actions to enforce the power of the as-

sociation, regardless of whether or not suit was initiated . . . .” (emphasis added).

33. See Bd. of Managers of 140 East 56

St. Condo. v. Hausner, 245 A.D.2d 209, 210 (N.Y.

App. Div. 1996). According to Fierro, supra note 7, at 268-69, the answer lies somewhere be-

tween the $9,000 in attorney’s fees awarded in Wehunt v. Wren’s Cross of Atlanta , 332 S.E.2d

368, 368 (Ga. Ct. App. 1985), for the colle ction of $906 in common expenses and late charges,

and the trial court award of $60,000 in the foreclosure of a $100 common assessment, which was

ultimately reversed in Ziontz v. Ocean Tra il Unit Owners Assoc’n, 663 So. 2d 1334, 1335-36 (Fla.

Dist. Ct. App. 1993).

34. See Fierro, supra note 7, at 269 (“Practically speaking, the inclusion of a provision al-

lowing the recovery of costs and attorney’s fees in the condominium documents is of utmost im-

portance to augmenting its significance and its potential enforceability.”).

35. Puerto Rican Condominium Law, supra note 10, art. 39 (codified at P.R. LAWS ANN.

tit. 31, § 1293c (2005)).

36. Singapore Strata Title Act, supra note 8, art 40, §10.

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5. Deprivation of Votes. Late payment not only results in the

accrual of interest or monetary penalties but can also attract non-

financial sanctions, including the loss of the right to vote at general

meetings and a prohibition on the use of common services or of

common areas of the scheme.

The Québec Civil Code (article 1094) automatically suspends

owner’s voting rights if she falls three months behind in the payment

of common expenses.

In other jurisdictions, the suspension kicks in

after one

or two months’ default and is only operative once the sus-

pension is approved at the general meeting, and the defaulting owner

is duly notified.

In South Africa, the suspension applies only in the

case of ordinary owner resolutions and not for matters requiring a

special or unanimous resolution. Furthermore, an owner who is in ar-

rears may still attend and speak at general meetings, and the mort-

gage creditor of such owner’s unit is entitled to vote as the owner’s

proxy.

According to Puerto Rican case law, the suspension of voting

rights also applies to unanimous resolutions, thus depriving the de-

faulting owner of the capacity to veto a unanimous resolution.

addition, the value of the defaulting owner’s vote will not be taken

into account for quorum purposes. The suspension is lifted only when

the whole debt is satisfied or the treasurer certifies before the meet-

ing that the owner is keeping up with rescheduled payments approved

by the board of directors.

The suspension of voting rights may be unconstitutional if not

preceded by a due process hearing.

This concern is especially real

when resolutions of the general meeting affect the property rights of

the unit owner. Therefore, the statutes that allow the defaulting unit

owner to attend and take part in the deliberations of the general

meeting seem more acceptable. In addition, a suspension of voting

rights might not yield the desired results. Many owners who do not

37. CIVIL CODE OF QUÉBEC [C.C.Q.] art 1094.

38. See, e.g., Spanish Law on Horizontal Property, supra note 2, art. 15.2.

39. See, e.g., Mexican Law on Condominiums, supra note 10, art. 36.

40. South African Model Bylaws, supra note 23, R. 64(a)-(b).

41. Asociación de Condómines, Quadrangle Medical Centre v. Ramírez Lizardi 2001 JTS

114.

42. Puerto Rican Condominium Law, supra note 10, art. 39 (codified at P.R. LAWS ANN.

tit. 31, § 1293c (2005)).

43. Fierro, supra note 7, at 262 (supporting the argument that resolutions at a general

meeting might affect the property rights of a unit owner, and that their suspension must follow

the requirements of due process).

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134 DUKE JOURNAL OF COMPARATIVE & INTERNATIONAL LAW [Vol 16:125

pay their contributions care little about the operation of the condo-

minium scheme and rarely attend general meetings. In these cases

suspension of voting rights has a minimal effect on encouraging com-

pliance. On the whole, the difficulties involved in enforcing the sus-

pension of voting rights outweigh the deterrent value of this sanc-

tion.

6. Suspension of Services. The Puerto Rican statute allows the

board of directors to suspend common services such as water, elec-

tricity, gas, and telephone services when an owner defaults on his con-

tributions for more than two months.

After the first month, the

board of directors must notify the defaulting owner of its intention to

suspend the services in the manner agreed upon at the general meet-

ing or in accordance with the by-laws of the scheme. Prior to the in-

terruption of the services, the board of directors must ensure that the

suspension would not affect the health of the owners concerned. Ser-

vices will only be restored once the outstanding debt has been paid in

full.

The statute further provides that cable television, video, and

other services provided by common installations may be suspended if

the owner is more than three months in arrears with his payments.

Since these two articles substantially overlap, legislative amendment

is necessary to reconcile the period of default required for suspension

of services. The owner or occupier whose services have been sus-

pended may not, without the authorization of the board or the man-

ager, reconnect the services himself or with the help of a third party.

If he does so or in any other way makes illegal use of common facili-

ties of which he has been deprived, he will incur a penalty of triple the

amount due, including the principal sum plus interest. This penalty is

without prejudice to other applicable civil, administrative or criminal

sanctions.

This sanction may be quite effective to enforce the payment of

monthly contributions where the unit owner is solvent. Cutting off

the water or electricity of a unit might bring a solvent owner to his

44. Id.

45. Puerto Rican Condominium Law, supra note 10, art. 38 (codified in § 1293b).

46. Id.

47. Id. art. 39 (codified in § 1293c).

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senses and encourage him to pay his contributions promptly.

Note,

however, that without authorization in a condominium statute or the

bylaws, such action would constitute spoliation and the association

could be ordered by the court to restore the status quo ante.

Note

further that it is difficult to see how cutting off essential services

would not affect the health of the defaulter. It is also questionable

whether condominium associations should be given such wide pow-

ers. They are neither courts nor public service bodies and should not

be encouraged to turn to such extremes. If the owner is both sensible

and solvent yet refuses to pay, he may well have a valid reason.

Rushed action by the association might not only lead to claims for

restoration but might also ground an action for damages. If the

owner is not solvent, it might cause unnecessary hardship to an owner

who is already struggling to keep his unit from being sold at a forced

sale.

7. Loss of Locus Standi to Sue. The Puerto Rican statute adds

another sanction for owners with outstanding debts, applicable after

only one month’s default. It states that in order to challenge any

resolution of the board or the general meeting (except those relating

to maintenance and special contributions) in court or in any other

administrative tribunal, the owner must be up to date with his pay-

ment of contributions. The court or tribunal must give both sides the

opportunity to be heard and may decide in accordance with the law,

equity, and good neighborliness to validate the locus standi of the de-

faulting owner.

8. Shame Sanctions. The Spanish and the Colombian statutes

contain so-called “name and shame” sanctions to embarrass default-

ing owners into paying outstanding debts owed to the association.

The 1999 amendment to the Spanish statute requires that the notice

convening a general meeting must contain a list of the names of the

owners who are in arrears with the payment of their debts to the as-

48. See, e.g., Devis v. Leafmore Forest Condominium Assoc’n of Owners, 407 S.E.2d 76,

76-78 (Ga. Ct. App. 1991) (providing an example from the U.S. in which the court held that

condominium associations could terminate water and gas, limit access to cable television se rvice,

and limit the use of a condominium unit if the owner is in arrears with paying his contributions).

49. See, e.g., Froman v. Herbmore Timber and Hardware 1984 (3) SA (W) at 609, 609-11 (S.

Afr.). But see, e.g., Plaatje v. Olivier 1993 (2) SA (O) at 156, 156-60 (holding that a spoliation

procedure was not necessary to compel the supply of water).

50. Puerto Rican Condominium Law, supra note 10, art. 42 (codified in § 1293f).

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136 DUKE JOURNAL OF COMPARATIVE & INTERNATIONAL LAW [Vol 16:125

sociation. At the start of the meeting, a warning must be given to

those owners with unsatisfied debts who are at risk of being deprived

of their vote.

In addition to including the names of defaulters in the minutes of

the general meeting, the Colombian statute authorizes the publication

of their names on a notice board in an appropriate location in the

condominium complex. In order to guarantee that the notice is for

the eyes of residents only, the notice may not be displayed in a place

frequented by visitors to the building.

While these sanctions might

seem appropriate in some jurisdictions, other jurisdictions may view

them as an unacceptable intrusion into the privacy of the individuals

concerned.

9. Recourse through the Tenant. Several statutes allow some

kind of recourse for unpaid contributions through the tenant if the

unit of the defaulting owner is leased. Such recourse either takes the

form of a security right in respect of the outstanding rent, or a direct

action by the association against the tenant for rent owed on the

apartment in satisfaction of the debt or part thereof. The French

statute grants the association certain rights over the rent owed to the

defaulting owner in the case of a lease of a furnished apartment.

contrast, the Ontario Condominium statute provides that, on default,

the corporation may, by written notice, require the lessee to pay the

lesser amount of the default and the amount due under the lease.

The Puerto Rican statute is even more direct. It provides that if the

unit is let, the association can request a court order compelling the

tenant to pay all rent due directly to the management council of the

scheme for the benefit of the association until the whole debt is extin-

guished.

The Colombian statute employs a third mechanism. It

provides that the owner and the person occupying the unit, by what-

ever title, are jointly and severally liable to the association for any

51. Spanish Law on Horizontal Property, supra note 2, art. 16.

52. Colombian Law 675 of 2001, supra note 10, art. 30.

53. French Law No. 65-557, supra note 9, art. 19 (granting the association special rights to

the furniture in the apartment in the case of the lease of a furnished apartment).

54. Ontario Condominium Act, supra note 8, art. 87, paras. 1-2 (providing that the notice

may be by personal service or by sending it by prepaid mail addressed to the lessee at the ad-

dress of the unit).

55. Puerto Rican Condominium Law, supra note 10, art. 39 (codified in § 1293c).

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contributions due.

This means that a tenant or other occupier can

be sued directly, whether or not the owner defaults on his or her

payments. Note that the occupier would only be liable for claims that

arise after the commencement of his occupation and would have re-

course against the owner for payments made to the association.

In practice, the agents collecting the rent on behalf of the owner

usually deduct their commission and monthly contributions from the

rent they collect before passing on what is left to the owner-landlord.

This practice should be embodied in legislation, which automatically

diverts the required portion of the rent to the association. The Co-

lombian approach of holding occupiers liable even if they do not nec-

essarily pay rent (a student living in the apartment of his father, for

example) is also sound. Since the occupier enjoys the use of the

common property and the facilities and services of the scheme, it is

only just that he may be called upon to pay for contributions that the

owner cannot pay. In fairness, such liability should be limited to six

months arrears, which would leave time for the association to resolve

the situation.

10. Mechanisms Designed to Safeguard the Claims for Out-

standing Debts on Transfer of the Unit. The statutes employ various

mechanisms to ensure that the body corporate does not suffer finan-

cially when the seller of an apartment has not cleared all his assess-

ment debts at the time of transfer. In jurisdictions that require notar-

ial documentation for transfers, special provisions are added to

procure the help of notaries in the collection process or in notifying

the purchaser of outstanding contributions. Purchasers may obvi-

ously obtain such information from the condominium association it-

self, but in obliging the notary to notify the purchaser, future conflict

is avoided with regard to collection or the purchaser’s awareness of

the outstanding debt that might encumber the apartment. Notaries

who ignore their legal obligations in this regard may be subject to dis-

ciplinary measures and civil sanctions.

Some statutes go further still,

placing an embargo on transfer unless all the contributions due have

56. Colombian Law 675 of 2001, supra note 10, art. 29 (“[E]xistirá solidaridad en su pago

entre el propietario y el tenedor a cualquier título de bienes de dominio privado . . . .”).

57. Id.

58. See Pedro A. Malavet, The Foreign Notarial Legal Services Monopoly: Why Should We

Care?, 31 J. MARSHALL L. REV. 945, 966-67 (1998) (stating that notaries in jurisdictions outside

the United States are generally subject to civil and criminal liability in the practice of their pro-

fession).

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138 DUKE JOURNAL OF COMPARATIVE & INTERNATIONAL LAW [Vol 16:125

been paid or acceptable security has been offered for payment. Fi-

nally, some statutes impose liability for payment on the incoming

purchaser, while most of these statutes combine this with joint and

several liability (in solidum) on the part of the seller and the pur-

chaser for outstanding contributions.

The Argentine Civil Code contains the general provision that

debts owed by the transferor pass to his universal and particular suc-

cessors. Particular successors, however, are liable only for amounts

up to the value of the unit transferred to them.

The Commonhold

Community Statement (model bylaws) of the new English Common-

hold statute contains a similar provision. It requires that, on transfer,

the new unit holder, following a notice procedure, must pay any out-

standing commonhold contributions and reserve fund payments and

any interest that has accrued on the default of his predecessor.

This

could create reluctance on the part of purchasers to purchase any unit

burdened with any significant assessment liability and could even lead

to the discharge of arrears by the selling unit holder to facilitate the

sale.

But a former unit holder has no liability under the Act for un-

paid contributions passed to the purchaser.

The furthest the English

rule goes is to deem the right of the association to enforce payment of

assessment arrears to be assigned to the new unit holder, if he

promptly clears the arrears.

The Spanish statute imposes liability on the transferee

of a unit

for contributions that remained unpaid for the current and the previ-

ous year.

It even goes so far as to create a legal hypothec on the unit

sold as security for the unpaid contributions.

In order to relieve the

burden upon incoming owners, the Spanish statute requires that the

59. CÓD. CIV. art. 3266 (Arg.).

60. Commonhold Community Statement, art. 4, paras. 4.7.3, 4.7.5. See also Commonhold

and Leasehold Reform Act, 2002, c. 15, § 16 (Eng.) (specifying the effect of the Commonhold

Community Statement on the transfer of units).

61. Commonhold Community Statement, art. 4, paras. 4.7.1, 4.7.2, 4.7.4 (stating that a unit

holder can require the association, within 14 days of the notice, to certify sums claimed as owed

prior to transferring the unit and that sum is the maximum the new owner must pay).

62. Commonhold and Leasehold Reform Act, 2002, c. 15, §16, para. 2 (Eng.).

63. Commonhold Community Statement, art. 4, para. 4.7.7 (Eng.); Commonhold and

Leasehold Reform Act, 2002, c. 15, § 16 (Eng.) (specifying the effect of the Commonhold

Community Statement on the transfer of units).

64. The cause of the transfer, whether it be a sale, exchange, donation, inheritance, etc., is

of no importance.

65. Spanish Law on Horizontal Property, supra note 2, art. 9.

66. “El piso o local estará legalmente afecto al cumplimiento de esta obligación.” Id.

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public deed transferring the unit (usually a deed of sale) must contain

a certificate signed by the secretary and countersigned by the presi-

dent, which either states that all sums due have been paid or mention

the amount still due. No transfer is possible without such certificate

unless the transferee (purchaser) expressly exempts the notary from

including the certificate in the deed of transfer.

The above provision

constitutes an effective embargo against transfer of a unit unless con-

tributions still owed by the transferor (seller) have been fully paid. If

the purchaser has exempted the notary from including the certificate

in the notarized deed of transfer, the purchaser would incur liability

for all the debts still owed by the transferor (seller) in respect of the

unit. He would, however, incur such liability with full knowledge of

the consequences of granting the above-mentioned exemption.

A final provision requires the seller to notify the secretary of the

association of the change in ownership of the unit. Without such noti-

fication, the transferor would still be liable in solidum (jointly and

severally) with the transferee for outstanding contributions in respect

of the unit. In this situation, the former owner would be left with a

right of recourse against the new owner if the association succeeded

in a claim against him.

This is standard in cases of joint and several

liability, and the converse should also apply. Nothing prevents the

management association from instituting a claim jointly and severally

against both the former and the present owner.

This provision is not

applicable where any management body had express or implied

knowledge of the change of ownership.

The Mexican statute also requires that a certificate stating that

there is no outstanding debt in respect of the unit be issued to the

purchaser as part of the preparation of a deed of sale. If no such cer-

tificate is issued in respect of the unit, the transferor and transferee

will remain liable in solidum (jointly and severally) for the debt still

owed.

The Colombian statute starts with a general statement that the

transferor (seller) and the transferee (purchaser) are liable in solidum

for any outstanding debts of the transferor.

In order to safeguard

67. Id.

68. Id.

69. Id. art. 21.

70. Id. art. 9.

71. Mexican Law on Condominiums, supra note 10, art. 61.

72. Colombian Law 675 of 2001, supra note 10, art. 29.

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140 DUKE JOURNAL OF COMPARATIVE & INTERNATIONAL LAW [Vol 16:125

the interests of the transferee, it then requires the notary who pre-

pares the transfer documents to obtain a certificate from the legal

representative of the condominium association stating the amount of

debt still owed in respect to the unit.

If no such statement is ob-

tained, this fact as well as the liability in solidum of the transferor and

transferee must be communicated to the manager of the condomin-

ium.

The Puerto Rican statute proceeds from the premise that the

claim for common expenses constitutes a burden on the unit if regis-

tered in the land register. It then draws a distinction between volun-

tary and involuntary transfers of the unit. Voluntary transfer of the

unit includes all transfers to outsiders at any price, including transfer

to a mortgage creditor who purchases the unit for a sum exceeding

the outstanding debt. Involuntary transfer of the unit is limited to a

transfer to the mortgage creditor in a judicial auction where no out-

siders offered to purchase it for a price that equals or exceeds the out-

standing debt plus interest. In the case of a voluntary transfer, the

transferor and transferee are liable in solidum for the outstanding

debts of the transferor. This includes a right of recourse for the pur-

chaser against the former owner.

In the case of an involuntary

transfer, the mortgage creditor, to whom the property is transferred,

is only liable for those unit debts that were incurred in the six months

before the acquisition of the unit.

The statute also extends this obli-

gation to financial institutions that had provided credit to purchasers

who bought units in a scheme on the basis of building plans before

the condominium building was completed.

In terms of the Québec Civil Code, the purchaser of a unit may

request a statement from the association (syndicat) detailing the

common expenses due with respect to the unit, adjusted to the last

annual budget. If the statement is not provided within fifteen days,

73. Id.; see also id. art. 51 (requiring the administrator to issue a certificate indicating the

outstanding debt in respect of the unit in every case of a change of owne rship of a unit).

74. Id. art. 29.

75. Puerto Rican Condominium Law, supra note 10, art. 41 (codified in P.R. LAWS ANN.

tit. 31, § 1293e (2005)).

76. Id. arts. 39, 41 (codified in §§ 1293c, e).

77. Id. art. 41 (codified in § 1293e). Financial institutions that take over units in building

projects in a mortgage foreclosure are not equated to developers and are thus exempted from

paying debts owed in excess of six months, provided that they do not take charge of the comple-

tion of the project. Id.

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2006] FINANCIAL OBLIGATIONS IN A CONDOMINIUM OWNERSHIP SCHEME 141

he will be under no obligation to pay the expenses.

This fits in well

with the notion of estoppel: the impression created by the silence of

the association is that there are no outstanding claims against the pre-

vious owner.

Having received the statement, the prospective pur-

chaser can presumably negotiate for a lower price. The loss suffered

on account of non-delivery of the statement must presumably be born

by the association or recovered from the official responsible for issu-

ing such a statement. The Québec Civil Code does not impose liabil-

ity in solidum on the purchaser of a unit and does not distinguish be-

tween voluntary and involuntary transfers of a unit. For example, the

Québec court has ruled that a mortgage creditor who takes over the

unit in a mortgage foreclosure is only liable for expenses arising sub-

sequent to his acquisition of the property by court order.

The French statute imposes a specific obligation on notaries in an

effort to eliminate outstanding debts in respect of the unit at the mo-

ment of transfer. It obliges the seller, on transfer of a unit, to furnish

the notary with a certificate from the manager of the building. The

certificate must specify that all debts have been paid, and it must have

been prepared within the last month. If this is impossible, the notary

must notify the manager of the building (syndic) by recorded delivery

within 15 days of the transfer of the unit that all debts have not been

paid. The syndic can then by notice oppose any transfer of funds until

assessment arrears have been paid off out of the proceeds. The no-

tice must indicate the cause and the amount of the debt and must be

served at a domicile within the jurisdiction of a court of first instance.

The embargo on disbursement to the seller is limited to the amount

mentioned in the notice. Any voluntary or judicial payments made in

contravention of the foregoing do not have any legal validity against

the syndic. An action by the syndic gives rise to a security right in

terms of article 19-1 in favor of the association (syndicat).

The Unit Ownership Act of Montana contains another example

of joint and several liability of the seller and purchaser of a unit.

This statute provides that the “consensual grantee” of a unit is liable

in solidum for the unpaid debts of the consensual grantor up to the

78. C.C.Q. art. 1069.

79. C.C.Q. art. 1062 annot. 1062/7 (citing Syndicat de la copropieté Le Château Bellevue c.

Paradis-Cotê, C.Q. St.-François, no. 450-32-004157-988, le 19 février 1999).

80. Bank Royale du Canada c. Syndicat Port Royal [1998] R.D.I. 705 (C.Q.).

81. French Law No. 65-557, supra note 9, art. 20.

82. MONT. CODE ANN. § 70-23-611 (1995).

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142 DUKE JOURNAL OF COMPARATIVE & INTERNATIONAL LAW [Vol 16:125

time of the grant or conveyance.

This is without prejudice to the

grantee’s right to recover from the grantor the amount paid by the

grantee.

In the case of an involuntary transferee (for example, when

the unit is taken over by a mortgagee at a foreclosure sale), the debt

of the former transferor is divided proportionally amongst all the unit

owners, including the purchaser.

A variant on the foregoing appears in the South African Sec-

tional Titles Act.

This Act provides that the land registrar is not en-

titled to register a transfer of a unit in the land register unless fur-

nished with a conveyancer’s certificate. This certificate must confirm

that, as of the date of registration, the body corporate (management

association) has certified that all moneys due to it have been paid or

that satisfactory provision has been made for the payment thereof.

This provision places a restriction on the transfer of a unit until arrear

levies have been paid.

In the South African courts, a dispute has

raged for some time over whether this embargo can be construed as a

tacit lien in favor of the association ranking above a previously regis-

tered mortgage. The Supreme Court of Appeal decided that this re-

striction could be significant in the case of the transfer from an insol-

vent estate.

In such a case, the embargo can be accommodated as

part of the “cost of realization” within the scheme provided for by the

South African Insolvency Act.

Consequently, the debt must be paid

before the applicable conveyancer’s certificate will be issued,

which

would then lead to the registration of the transfer of the unit. Only

then would the mortgagee be able to exercise his security right to be

satisfied out of the proceeds of the sale. However, in cases where the

transfer was not from an insolvent estate, the Supreme Court of Ap-

83. Id.

84. Id.

85. Id. § 70-23-610. The cost of foreclosure is borne by all the unit owners as well as the

purchaser and not by the purchaser alone. Id.

86. South African Sectional Titles Act, supra note 2.

87. Id. § 15B(3)(a)(i)(aa).

88. See id.

89. See, e.g., First Rand Bank Ltd. v. Body Corporate of Geovy Villa 2004 (3) SA 362

(SCA) at para. 27 (S. Afr.).

90. Insolvency Act 24 of 1936 § 89(1) (BSRSA 2000) (S.Afr.); see also Nel NO v. Body

Corporate of the Seaways Building 1995 (1) SA 130 (C) at 136E-F (S. Afr.) aff’d, Nel NO v.

Body Corporate of the Se aways Building 1996 (1) SA 131 (SCA) (S.Afr.).

91. Nel NO v. Body Corporate of the Seaways Building 1995 (1) SA 130 (C) at 139F (S.

Afr.).

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peal has refused to recognize that the embargo could be construed as

a security right, which affords the association a preferential right with

respect to outstanding debts pertaining to the unit.

Ultimately, the

provision is only effective in the case of insolvency of the transferor

by virtue of the peculiar provisions of the South African Insolvency

Act. In all other situations, this measure is effective only where the

unit owner has sufficient funds to satisfy his outstanding debts so that

the unit can be transferred.

In our opinion, an embargo on transfer or disbursement of the

proceeds of the sale to the seller-transferor, is, in principle, the most

efficient way of ensuring that the association is reimbursed for as-

sessment arrears. Since the transferor is ultimately responsible for

paying the assessment debt up until transfer, it seems only fair that

the purchaser-transferee should have a right of recourse against the

seller-transferor if he is forced to pay the outstanding debts of the

former. If this right of recourse proves fruitless, the loss should still

fall on the purchaser who, by virtue of most statutes in most jurisdic-

tions, has the right to obtain a certificate from the association indicat-

ing the extent, if any, to which contributions remain unpaid.

C. Measures to Protect the Financial Position of the Management

Association where the Financial Position of the Unit Owner Is

not Sound

1. Introduction. In order to protect management associations

from financially weak owners, several statutes grant the management

association some kind of automatic security right over the most valu-

able assets of such defaulting owners, namely their movable or im-

movable property (the apartment). These assets are encumbered

automatically. Although most statutes require that the security right

be registered, the right is created without the necessity of a court or-

der. The most important question to be considered below is whether

and to what extent the association’s security right for unpaid contri-

butions has priority over previously registered mortgages that already

burden the apartment.

92. First Rand Bank Ltd v. Body Corporate of Geovy Villa 2004 (3) SA 362 (SCA) at

paras. 30-31 (S.Afr.).

93. See, e.g., Commonhold Community Statement, art. 4, para. 4.7.4; MONT. CODE ANN. §

70-23-611 (1995).

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144 DUKE JOURNAL OF COMPARATIVE & INTERNATIONAL LAW [Vol 16:125

2. Automatic Lien over Movable Property. France is the only

one of the statutes analyzed here in which a lien over the movable

property of the unit owner is used as a security mechanism. In other

countries, in order for movable property to attach, it must be seized in

an embargo procedure. The French statute extends the application of

the special privilege (lien) created in article 2102, par. 1, of the French

Civil Code to the condominium association (syndicat).

This privi-

lege (lien) gives the association a preferential claim to the furniture in

the unit when the unit has been rented out as a furnished apartment.

Further, this privilege secures all claims that are due or will become

due to the association. If the furniture is removed, the association can

retain its security by demanding restoration within 15 days.

3. Automatic Liens over the Apartment of the Defaulting

Owner. Since the apartment is usually the most valuable asset of a

defaulting owner, several statutes grant the management association

an automatic lien against the unit and its appurtenant share in the

common property. In Ontario, this security right is linked to the un-

paid amount, interest thereon, and all costs and expenses incurred in

the collection or attempted collection of the debt.

This lien expires

three months after the default occurred, unless the corporation regis-

ters a lien over the unit, having notified the owner ten days in ad-

vance. Once registered, the lien may be enforced in the same way as

a mortgage.

Also in Ontario, on prior notification, the lien has pri-

ority over existing registered and unregistered encumbrances.

How-

ever, this priority does not extend to certain claims by the Crown and

municipal claims for taxes, charges, rates or assessments.

Under the British Columbia Strata Property Act, the manage-

ment corporation is also empowered to register a lien against an

owner’s strata unit (lot) for non-payment of strata fees or a special

levy if the owner has not responded to a two weeks’ notice for pay-

ment and has been warned that a lien would be registered in case of

94. French Law No. 65-557, supra note 9, art. 19.

95. C. CIV. art. 2102 (Fr.).

96. Ontario Condominium Act, supra note 8, § 85(1).

97. Id. §§ 85(2)-(6).

98. Id. §§ 86(1), (3), (5).

99. Id.

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non-payment.

100

On registration, the lien ranks before every other

lien or registered charge, except for certain charges in favor of the

Crown,

101

and entitles the management corporation to apply to the

Supreme Court for an order for a forced sale of the unit (lot).

102

Such

an order must provide that if the debt is not paid within the time pe-

riod required by the order, the strata corporation may sell the strata

lot at a price and on terms to be approved by the court.

103

Reason-

able legal costs, land title and court registry fees, and other reason-

able disbursements in connection with the registration or enforce-

ment of a lien may also be added to the amount due.

104

The Singaporean Act creates a similar statutory charge if a con-

tribution remains unpaid for a period of 30 days after a written de-

mand for payment has been served and the charge has been regis-

tered.

105

If a prior mortgage or charge creditor sells the lot in exercise

of a power of sale, the Act expressly provides that the registered

charge of the management corporation shall not be defeated by the

exercise of such power of sale.

106

Following the procedure and pre-

cautions set out in the Act, the management corporation may finally

sell the unit affected if the levies remain unpaid.

107

If the lot is bur-

dened with a prior mortgage, the management corporation would, in

practice and in view of its priority in such a case, try to save the cost

of litigation and wait for the mortgage creditor to exercise its power

of sale.

Under the Spanish statute, claims of the management association

for the present and previous year take precedence over registered

mortgages and claims provisionally registered in the land register as a

result of attachments, seizures or execution of a judgment by order of

the court. However, they rank lower than tax claims, certain insur-

100. B.C. Strata Property Act, supra note 8, §§ 112, 116(1), 116(2). Section 116(1) notes that

a lien can also be registered if the money is owed as reimbursement of the cost of work under-

taken by the corporation and the strata lot’s share of the judgement debt against the strata cor-

poration.

101. Id. §§ 116(4)-(5). The lien further does not enjoy priority to the extent that the corpora-

tion’s lien is for a share of a judgment against the strata corporation.

102. Id. § 117.

103. Id.

104. Id. § 118.

105. Singapore Strata Title Act, supra note 8, § 43(1).

106. Id. § 43(2)(b).

107. Id. § 43.

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146 DUKE JOURNAL OF COMPARATIVE & INTERNATIONAL LAW [Vol 16:125

ance claims, and certain other security rights over the unit.

108

France, the administrator (syndic) may register a hypothec over the

unit for contributions due over the last five years.

109

No registration

or supplementary registration can be requested for a debt due that is

over five years old.

110

The Puerto Rican statute grants the management association a

lien over a defaulting owner’s unit for outstanding maintenance and

other contributions ranking above all other claims, subject to a few

exceptions. The exceptions are as follows: state and municipal claims

for property taxes for the current year and the five years prior; claims

for outstanding insurance premiums in respect of the unit and the

building for the last two years; and, most importantly, registered

mortgages.

111

If the debt is claimed in court, the association can re-

quest that a restriction be placed on the unit preventing it from being

encumbered any further. Once the embargo is decreed, it is the re-

sponsibility of the board of directors to file a certified copy of the

embargo with the public land registry to be noted in the appropriate

files.

112

In summary, the security right over the unit of an apartment

owner for unpaid contributions sometimes arises automatically, but it

must ultimately be registered to obtain validity. The secured claim in

terms of the security right varies from two to five years. In some

cases, the security right is granted priority over existing mortgages,

while in other cases it is not. In what follows, we shall scrutinize the

United States practice and, in particular, the super lien granted by the

UCIOA in order to find the ideal solution.

4. U.S. Practice. In the United States, many state statutes and

condominium declarations provide for liens against units to secure

payment of contributions from the unit owner.

113

However, despite

common law authority to the contrary, many statutes or condomin-

ium declarations have typically ranked these assessment liens lower

108. Spanish Law on Horizontal Property, supra note 2, art. 9; CÓD. CIV. art. 1923 (Spain).

109. French Law No. 65-557, supra note 9, arts. 19, 19-1.

110. Id.

111. Puerto Rican Condominium Law, supra note 10, art. 40 (codified at P.R. LAWS ANN.

tit. 31, § 1293d (2005)).

112. Id. art. 39 (codified in § 1293c).

113. See Winokur, supra note 11, at 357.

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than mortgages recorded at an earlier date.

114

This placed associa-

tions in an unenviable position, since foreclosure sales rarely produce

proceeds sufficient to satisfy the unpaid contributions secured by the

association’s lien. In a weak market where the proceeds of the sale of

the unit do not even cover the outstanding debt of the first mort-

gagee, the association’s lien would be worthless.

115

It is generally accepted that the needs of mortgage lenders who

play a crucial role in the development of condominiums must be ad-

dressed. However, it must be pointed out that the financial strength

of an association has a strong effect on the value of the apartments in

which both lenders and residents have invested. Difficulties experi-

enced in the collection of contributions affect the lender itself, since

not only the value of the unit concerned but also the values of other

units in the condominium which he holds as security would decrease.

As a result of the economic interdependence of unit owners, the un-

collectible shares of defaulting unit owners are passed on to their pay-

ing neighbors. These increased contributions put greater pressure on

conforming owners to also default or sell their units at lower prices in

order to avoid unexpected assessment costs.

Furthermore, financially weak associations that find it hard to

justify the cost involved in pursuing the collection of unpaid contribu-

tions set contributions at an artificially low level by cutting back on

maintenance and management.

116

This strategy not only overburdens

upstanding owners but also hastens the decline of common facilities

and the need for major replacement of condominium assets. These

conditions are greatly exacerbated in hard economic times. Foreclo-

sures and abandonment of units severely deplete the assessment base

and property values within these condominiums. As the assessment

base dries up, associations will be left with the choice of either heavily

burdening the decreasing number of remaining solvent residents with

increased contributions or deferring necessary maintenance opera-

tions. This, in turn, will spark even higher levies as deferred mainte-

nance takes its toll. These problems will become more acute in the

future as condominium buildings become older.

117

The provision for

114. Id. at 357-58.

115. Id. at 358-59.

116. Id. at 359-60.

117. Id. This problem is especially acute in South Africa where more than half of the con-

dominium stock consists of old rental buildings that have been converted to condominiums. See

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148 DUKE JOURNAL OF COMPARATIVE & INTERNATIONAL LAW [Vol 16:125

reserve funds in most statutes does not solve the problem of rising re-

curring costs.

In non-condominium foreclosures, the lender will typically try to

protect his security by payment of property taxes, premiums on casu-

alty insurance, and physical maintenance of the house. The lender

should also realize that he is protecting his own interest by shoulder-

ing some of the responsibility for the payment of outstanding contri-

butions in condominium foreclosure scenarios. Furthermore, the

lender is able to protect himself against losses by a proper investiga-

tion of the borrower’s credit, by varying the size of the loan relative to

the value of the property, by requiring escrow funds to cover priority

claims, or by obtaining mortgage insurance. Being the unit owner’s

involuntary creditor, none of these safeguards are open to the con-

dominium association.

118

5. The Superlien of the Uniform Common Interest Ownership

Act (UCIOA). To strike an equitable balance between the need to

collect unpaid levies swiftly and the necessity to retain the continued

investment of lenders in condominiums, the UCIOA offers an ingen-

ious compromise: it grants the condominium association a super pri-

ority lien over previously registered (first) mortgages for unpaid con-

tributions for up to six months before the foreclosure action.

119

Computation of the amount of the lien is based on a periodically

adopted budget.

120

In reality, a lien with a split priority is created.

This perpetually renewable lien comes into existence once the as-

sessment or fine becomes due. As soon as a unit owner defaults on

his payments, it is transformed into a lien with super priority.

121

Any

excess of the total assessment defaults and fines or costs over the six

month ceiling remains a lien on the property. The portion of the as-

sociation lien securing this excess will be junior to the first mortgage

1 CORNELIUS VAN DER MERWE & D.W. BUTLER, SECTIONAL TITLES, SHARE BLOCKS AND

TIME-SHARING 7-14 n.63 (1999).

118. See Winokur, supra note 11, at 360-61.

119. UCIOA §§ 3-116(a), (b), (d), (h). See Winokur, supra note 11, at 366-68 on the ques-

tion of whether a non-judicial foreclosure also qualifies as an “action.”

120. UCIOA §§ 3-116 (h), 3-103(c) (1994). See also Winokur, supra note 11, at 369, opining

that the UCIOA budget procedure strikes a good balance between insisting on methodical fi-

nancial planning by associations and allowing association boards space to govern without severe

interruption by unrepresentative, disgruntled owners.

121. UCIOA § 3-116(b)(ii) (1994). For the position of condominium associations existing

before the introduction of the super lien, see Winokur, supra note 11, at 369-74.

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2006] FINANCIAL OBLIGATIONS IN A CONDOMINIUM OWNERSHIP SCHEME 149

on the unit, but senior to other mortgages and encumbrances not re-

corded before the declaration. Thus, although the association’s lien is

a single lien, it is split into two liens holding varying priority.

122

The

mortgage foreclosure can thus extinguish whatever portion of this lien

is not prioritized as it would any junior lien.

123

Subject to any contrary

language in the declaration, the UCIOA’s assessment lien covers

regular monthly dues, as well as fees, charges, fines and interest.

124

The lien and its statutory priority may not be waived.

125

To benefit from this mechanism, the association must record a

verified claim for unpaid contributions, which describes the amount

due, the name of the owner, and the common elements of the scheme.

There is no need to record the lien, since recording of the declaration

on establishment of the scheme is considered notice of any future

claim of the association and perfection of the lien.

126

A lender or pro-

spective lender is not kept ignorant of the outstanding amount. The

former may at any time ascertain this amount by requesting that the

unit owner obtain from the association a recordable statement indi-

cating the precise amount of any arrears.

127

If the unit owner fails to

pay, the association can collect the assessment by taking advantage of

122. Winokur, supra note 11, at 366 (showing that such a split priority is also encountered in

a construction loan lien securing future optional advances held partially senior and pa rtially jun-

ior to an intervening materialman’s lien, based on advances made before a materialman’s lien

attached). See id. at 374-75 for the ranking of mechanics’ liens vis-à-vis the super lien.

123. Winokur, supra note 11, at 363 (discussing the possible advantages of instalment as-

sessment obligations and providing a reference to WASH. REV. CODE § 123.1 64.34.364(1)

(1990) as an illustration).

124. UCIOA § 3-116(a) (1994). Some states expressly add attorney’s fees. See, e.g., COLO.

REV. STAT. § 38-33.3-316(1) (1991) (Supp. 1991); CONN. GEN. STAT. § 47-258(1991). See Karen

Ellert Peña, Reining in Property Owners’ Associations’ Power: Texas’s Need for a Comprehen-

sive Plan, 33 ST. MARY’S L.J. 323, 350 (2002), for a discussion of § 207.125(j) of the proposed

Texas Planned Community Act, which prohibits the association from foreclosing a lien for an

assessment consisting solely of fines or attorney’s fees associated with fines.

125. UCIOA § 1-104 (1994). See generally Winokur, supra note 11, at 363-67.

126. UCIOA § 3-116(d) (1994). See generally Winokur, supra note 11, at 385-87.

127. See Robert G. Natelson, Condominiums, Reform, and the Unit Ownership Act, 58

MONT. L. REV. 495, 541-43 (1997). See also Winokur, supra note 11, at 387-89, which states that

instead of having assessment delinquencies recorded, the UCIOA § 3-116(h) allows a unit

owner to request a recordable assessment status certificate from the association indicating the

unpaid contributions charged against the owner. This certificate, which must be delivered

within ten business days, is binding on the association, the board and all the unit owners. The

certificate statement can be placed on public record and presented to other interested parties,

such as a mortgagee or potential buyer. In practice, buyers, lenders and title insurers regularly

insist on such an “estoppel statement” as proof that assessment delinquency does not encumber

the unit. Id.

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150 DUKE JOURNAL OF COMPARATIVE & INTERNATIONAL LAW [Vol 16:125

the local jurisdiction’s expedited foreclosure or holdover-tenant pro-

cedures.

128

Alternatively the association may simply wait and use the

lien to prevent the sale of the unit until the lien is paid off. If a unit

owner resists, or brings an action to challenge the imposition of fees

or the lien, or contests foreclosure and loses, the association is enti-

tled to attorney’s fees.

129

An association lien may be foreclosed in a similar manner to a

mortgage on real estate or by power of sale if the declaration allows

for such an option.

130

The association would join the holders of any

mortgage, deeds of trust or other interests junior to the super lien as

necessary parties to a judicial foreclosure, or formally notify these

parties of the sale in non-judicial foreclosure.

131

Holders of junior in-

terests would have the right to receive any excess of the foreclosure

sale price over the amount of the super lien in the order of their pri-

orities.

132

The association’s lien on an outstanding amount exceeding

six months from the date of action would be among those junior in-

terests.

133

If the first mortgagee institutes foreclosure proceedings on any

ground,

134

the mortgage and its foreclosure would be subject to an ex-

isting super lien.

135

As a senior interest, the association’s super lien

could probably not be forced into the mortgage foreclosure, but if the

association participates, payment of the super lien will be necessary to

clear title for resale or for presentation of mortgage insurance.

136

In the past, lenders tended to delay foreclosure on their mort-

gages for extended periods until they had worked out some disposi-

tion for the property.

137

This delay threatened many condominium

associations in economically depressed markets when a single lender

held defaulted mortgages on a substantial number of units with either

128. UCIOA § 3-116(j) (1994).

129. UCIOA § 3-116(g) (1994). See also Elberg, supra note 7, at 1974-75.

130. UCIOA § 3-116(j) (1994). See Winokur, supra note 11, at 376-77 (discussing the posi-

tion with regard to foreclosure by power of sale).

131. See Winokur, supra note 11, at 377.

132. Id.

133. Id.

134. This could be on mortgage payment default or in terms of a provision in the mortgage

deed allowing the mortgagee to initiate action on assessment default by the mortgagor-unit

owner.

135. See Winokur, supra note 11, at 371-74.

136. See Winokur, supra note 11, at 377-78.

137. Id. at 379.

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2006] FINANCIAL OBLIGATIONS IN A CONDOMINIUM OWNERSHIP SCHEME 151

insolvent or abandoning owners.

138

But now lenders are threatened

with substantial procedural delays if the association forecloses on its

super lien.

139

In order to retain control over foreclosure, the lender

may agree to pay delinquent contributions to the association. This

was the response envisaged by the drafters of the UCIOA.

140

Such payment might also seem attractive when assessment de-

fault is not accompanied by default in the mortgage payments, espe-

cially since most mortgage agreements allow a borrower’s delinquent

contributions to be added to the secured debt. Moreover, payment is

frequently realized by discounting the value of the unit by an amount

equal to the six months’ levies and adjusting the size of the loan ac-

cordingly. While still subject to the super lien being triggered on fu-

ture defaults,

141

with any luck those defaults will not immediately

prompt an association foreclosure. While the economy is strong, the

lender (mortgage creditor) can frequently encourage the unit owner

to cure his default and avoid future defaults even if this means provid-

ing the unit owner with some cash by raising the amount of the loan.

When the economy is weak, the lender would probably elect to re-

frain from paying contributions, obtain title to the unit in foreclosure,

and either sell or rent the unit for income to pay contributions.

142

the final analysis, the association has an interest in facilitating the

foreclosure: foreclosure results in a new owner for the unit, most

likely the initial lender, who will pay contributions regularly in the fu-

ture. If the lender holds multiple properties in a condominium

scheme, the resulting assessment income can be substantial.

143

A compelling case can be made for granting the assessment lien a

limited priority over first mortgages.

144

The money obtained from

unit owners is used to maintain the common property and to encour-

age efficient management and thus to protect the first mortgagee’s

(lender’s) security by maintaining or increasing the market value of

138. Id.

139. Id.

140. UCIOA § 3-116 (1994).

141. Payment by the lender does not necessarily trigger an equitable redemption of the su-

per lien due to the latter’s renewable character. See Winokur, supra note 11, at 380-84.

142. See id. at 385.

143. See id. at 377-79.

144. See generally Natelson, supra note 127, at 543; Winokur, supra note 11, at 357; Fierro,

supra note 7, at 265-66.

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152 DUKE JOURNAL OF COMPARATIVE & INTERNATIONAL LAW [Vol 16:125

his security.

145

Since the lender expects to spend money in other fore-

closure settings to protect his security, he should not balk at the idea

of a super priority of six months’ contributions that ranks above his

mortgage for money expended on the mortgaged property. Without

such priority, the costs of maintaining the building are diverted un-

fairly to the other unit owners who are ultimately liable for any short-

fall. Furthermore, mortgage foreclosures on units leave the associa-

tion with little remaining equity in the defaulter from which to collect

arrears; the other owners are not obliged and are often unwilling to

stand in for the shortfall whenever there is one. Over time, this lack

of money would ruin the reputation of the building and in turn the se-

curity of other lenders.

Again, where the association provides additional services in the

form of the provision of roads and garbage collection, such services

could be drastically impeded with a negative effect on the security of

lenders. In this context, the association’s lien is comparable to a local

authority’s charge on property for payment for services rendered.

Furthermore, lenders are in a much better position to protect them-

selves against default than the association. In principle, associations

are not allowed to restrict entry into a condominium scheme, whereas

lenders can choose the persons they want to do business with. In ad-

dition, lenders can obtain mortgage insurance and insist on escrow ar-

rangements (money paid into a trust account), as they already do for

taxes and insurance.

146

The idea behind limiting the super priority to

six months of periodic contributions levied pursuant to a budget is to

encourage associations to enforce the lien diligently and to take care

by budgeting meticulously. Since lenders are almost invariably suffi-

ciently sophisticated to have notice of the recorded condominium

declarations and can obtain a certificate indicating the outstanding

charges against a unit, they can devise an action plan to safeguard

their security.

147

In the United States fears have been expressed that the super

priority of the association would impair the sale of mortgages on the

145. According to most condominium statutes, a unit consists of a part icular apartment plus

an undivided share in the common elements. See, e.g., South African Sectional Titles Act, supra

note 2, § 1; MONT. CODE ANN. § 70-23-401 to 403 (1995).

146. Natelson, supra note 127, at 543.

147. The practice of furnishing such an “estoppel” certificate is well established. See, e.g.,

Uniform Ownership Act, MONT. CODE ANN. § 70-23-611 (1995).

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2006] FINANCIAL OBLIGATIONS IN A CONDOMINIUM OWNERSHIP SCHEME 153

secondary market.

148

This in turn would dry up mortgage funds to

prospective unit owners and interfere with the sale of condomini-

ums.

149

However, the most important lending institutions

150

expressly

contemplate acquisition of mortgages subject to the super lien.

151

Fur-

thermore, attorneys in states that have adopted the super lien insist

that there is no evidence that its existence impairs sales of mortgages

on the secondary market or indeed the sale of condominiums in gen-

eral.

152

It has also been suggested that the loss of priority would force

lenders to demand that each purchaser of a unit escrow six months of

contributions to stave off the risk of having to pay for defaulted con-

tributions.

153

Since developers may not be shown any preference in

the allocation of assessment liability, the substantial burden placed on

them during the early life of a condominium would substantially in-

crease the development cost of condominiums, which would be

passed on to purchasers. However, the expectation that escrows

would be required was one of the reasons behind the UCIOA’s provi-

sion limiting the super lien to six months’ arrears.

154

While experience

with the super lien suggests that lenders do not ordinarily impose es-

crow conditions on unit purchasers,

155

the imposition of escrow condi-

tions should be recognized as a legitimate cost generated by the main-

tenance of the building and other services and facilities in which unit

owners share. Furthermore, the requirement for escrow funds ulti-

mately protects the interests of the non-defaulting owners whose own

contributions might otherwise increase substantially upon the default

of other owners.

156

The UCIOA’s super lien should be seen as a genuine attempt to

protect the financial vitality of condominium associations, which are

148. Mortgage creditors sell their negotiable mortgage bonds in the secondary mortgage

market to investors who normally require these bonds to be insured with priority claims on the

property offered as security. See Winokur, supra note 11, at 390-91.

149. For unwarranted fears expressed by title insurers see Winokur, supra note 11, at 392-

93.

150. Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mort-

gage Corporation (Freddie Mae).

151. See Winokur, supra note 11, at 390 & n.157.

152. See id. at 390-91 & n. 158.

153. See id. at 391.

154. UCIOA, § 3-116, comment 1, 7 (1994); 7 U.L.A. at 529 (1982); Robert A. Wittie, Ori-

gins of the Community Association’s Special Lien Priority for Unpaid Assessments under the

Uniform Acts, 1 MULTIPLE OWNERSHIP ACTS SYMPOSIUM 171, 173 (1991).

155. See Winokur, supra note 11, at 392 & n.162.

156. See id. at 391-92.

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154 DUKE JOURNAL OF COMPARATIVE & INTERNATIONAL LAW [Vol 16:125

now performing many functions traditionally carried out by local au-

thorities in the United States, such as garbage collection and mainte-

nance of streets and parks. Problems with the collection of contribu-

tions would jeopardize important community services and would

place the burden of maintaining the common elements disproportion-

ately on the shoulders of the members who make timely payments.

The super lien would substantially improve the financial strength of

associations, address lender concerns by limiting the super lien to six

months’ arrear contributions and shield unit purchasers from addi-

tional payments. Furthermore, lenders have a variety of other means

of protecting themselves. Some added risk does not seem unduly bur-

densome in exchange for assuring maintenance of common property

and protecting the value of their collateral. A fair balance is thus

struck between the interests most closely involved. Again, this lien

can make sometimes enfeebled associations more aggressive vis-à-vis

other foreclosure claimants and “leaner” by compelling them to

streamline association budgeting, increase responsiveness to inquiries

and document their affairs more thoroughly.

157

CONCLUSION

It is clear that condominium associations must be given teeth to

enforce the payment of contributions. A quick solution is needed in

order to place associations in a position where they can manage the

scheme effectively and not procrastinate on maintenance and repairs.

What is needed is a swift, inexpensive procedure to allow the associa-

tion to gather funds in a short time. For this purpose, associations in

many countries have to fall back on ordinary recovery of debt proce-

dures, while some jurisdictions provide for a swifter summary proce-

dure in their condominium statutes.

The best solution is offered by the Singaporean statute, which al-

lows condominium associations to institute their claims for arrear

contributions in small claims courts. These courts, as elsewhere, are

157. See id. at 294-95; id. at 395 (summarizing the technical problems impeding the function-

ing of the super lien provisions of the UCIOA); Ronald B. Cox, Case Law Development: Com-

mercial Law: II. Purchase Money Mortgage Held Superior to Liens for Past Due Assessments, 47

S.C.L. REV. 26, 30-31 (1995); Peña, supra note 124, at 350, 363-64 (arguing for better protection

of the owner at a foreclosure sale and for more compassionate means of enforcing an owner’s

assessment debt). See also Natelson, supra note 127, at 546-47 (criticizing provisions that allow

the association to collect rent from the unit owner after default until eviction).

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2006] FINANCIAL OBLIGATIONS IN A CONDOMINIUM OWNERSHIP SCHEME 155

renowned for their swift and inexpensive operation.

158

As in the case

of ordinary debtors, defaulters on contributions should be obliged to

pay interest on late payments as well as the cost of collection, includ-

ing reasonable attorney’s fees. Deprivation of the vote of defaulting

owners would have little deterrent value. However, if compatible

with the social mores of a country and the owner’s human rights,

159

the imposition of fines, the cutting off of services and use of facilities,

and the “name and shame” measures discussed above might well

make a solvent owner think twice before he falls into arrears with his

payments.

However, the crucial question is how the condominium statutes

should deal with the unit owner who has financial difficulties in keep-

ing up with his payment of contributions. Most statutes allow for the

attachment of the movable (personal) property of the defaulter and

ultimately for foreclosure on the unit itself. Alternative dispute reso-

lution procedures might be helpful to bring the defaulter, the associa-

tion and lenders (mortgage creditors) together in an effort to re-

schedule the mortgage debt and/or work out ways in which the

contribution debt can be satisfied.

160

The debtor may, for instance, be

able to refinance his unit with his original mortgage creditor and use

the additional amount to pay his arrear contributions.

161

But ultimately a quick measure is needed to replace the defaulter

with a solvent new owner who can honor his contribution payment

obligations to the association. In this regard, the super lien proposed

by the UCIOA seems to offer an ideal solution. The compromise

reached for the division of the proceeds of the foreclosure sale seems

fair and financially sound. The priority claim for six months arrears

158. See also Hadley Batchelder, Mandatory ADR in Common Interest Developments:

Oxymoronic or just Moronic, 23 T. JEFFERSON L. REV. 227, 240 (2001).

159. Article 8 of the European Convention of Human Rights identifies respect for private

life and the home as an important human right, which can only be infringed if such an infringe-

ment is proportionate to the offense. Convention for the Protection of Human Rights and Fun-

damental Freedoms art. 8, opened for signature November 4, 1950, 213 U.N.T.S. 222. In princi-

ple, a condominium association as a non-public, non-governmental body would generally be in a

very weak position to justify infringing human rights on the European stage.

160. A struggling artist can, for instance, be employed to complete artwork authorized by

the general meeting in the common areas. Depending on their individual skills, other unit own-

ers can be required to provide a specific service relating to cleaning, maintenance or security in

order to “work off” their arrears. For criticism of using ADR processes to recover arrear con-

tributions, see Batchelder, supra note 158, at 236-40.

161. This is normally an option for retired unit owners who have good credit ratings but

have developed cash flow problems as a result of small pensions.

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156 DUKE JOURNAL OF COMPARATIVE & INTERNATIONAL LAW [Vol 16:125

should encourage the management association to act swiftly to get the

condominium scheme back on track by providing for a solvent new

owner prepared to regularly pay his or her contributions to common

expenses.