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HB 22-1137 one year later-- financial and other impacts

08/01/2023 9:18 AM | Anonymous member (Administrator)

By David Graf, Moeller Graf, P.C.

HB 22-1137 (“1137”) was the most impactful community association legislation since CCIOA was adopted in 1992. CCIOA’s legislative declaration, at C.R.S § 38-33.3-102(b), states that the “continuation of the economic prosperity of Colorado is dependent upon the strengthening of homeowner associations in common interest communities financially to the setting of budget guidelines, the creation of statutory assessment liens, the granting of six months’ lien priority, the facilitation of borrowing, and more certain powers in the Association to sue on behalf of the owners enter enhancing the financial stability of associations by increasing the Association’s powers to collect delinquent assessments, late charges, fines, and enforcement costs…”

Little more than a dozen years later, SB 100, effective in 2006, was adopted as a “homeowners’ protection act” to protect owners from their associations in certain respects. Fast-forward to 2022, 1137 passes through the legislature to provide additional owner protections with respect to assessment collections and covenant enforcement, largely as a result of negative homeowner experiences in two communities within the state.  

I’ve gotten to know some of the stakeholders who were behind 1137, and without exception, I have found them to be well-intentioned, decent, and reasonable people. I’ve also had conversations with some of the legislators who brought forth 1137 and I have found them to be sincere in their efforts to address what they see as the primary issues affecting community association collections and covenant enforcement here in Colorado. I don’t personally believe that any of these individuals are actively trying to destroy communities, nor are they anarchists, or opposed to holding owners to their responsibilities to their neighbors by virtue of living in a common interest community.

We don’t always agree on where the pendulum should fall between vigorous enforcement of community standards and obligations, on the one hand, and a lack of enforcement of community standards and obligations for the benefit of a few to the detriment of the many, on the other hand. For everyone who doesn’t have to pay their assessments, their neighbors have to absorb that debt. For those who take good care of their property, it is of little comfort when they walk out the front door and have to look at the blighted property next to them. The goal of everyone, 1137 stakeholders included, should be to find a balance where people can come back into compliance while the needs of the neighbors are honored for the most part, for most of the time. 

On the topic of collections, associations had to adopt a new collection policy and essentially “retool” their collection process, time frames, and form documents based on the requirements of 1137. This created a gap in collection activity, in my experience, of about six months. I have heard reports of accounts receivable balances increasing during this window of time, and while I believe some of it is due to a lack of collection effort, some of it could also be attributed to the softening economy.

The posting of the delinquency notice on the door is an issue that caused a lot of stress to boards and management teams. The concerns were that the cost of the posting, the safety of who was doing the posting, and the potential for a negative owner experience in having a delinquency notice posted on the door early in the collections process. All of those concerns, in my experience, were valid. However, I have heard that the posting on the door has been effective in getting the attention of owners to pay their assessments.

I don’t believe that anyone would dispute that the number of foreclosures filed by associations after the effective date of 1137 has fallen dramatically. There are a number of limitations on association foreclosures imposed by 1137. I’ve discussed this issue with a few stakeholders and other interested parties and they seem to believe that due to the falling number of foreclosures, the bill has worked as intended. I don’t think that the analysis is quite as straightforward. Yes, I think that non-urgent foreclosures being prohibited is a good thing. With that said, there are times when foreclosures may be the only remedy available to a community association.

For example, I’ve experienced board members who were scared to foreclose on an owner notwithstanding the fact that a judgment had already been entered against them, numerous collection remedies had been pursued, and the owner still has not made a payment in several years. If all other remedies have proven ineffective and the owner appears to be intent on not paying and not communicating with their association, foreclosure should be a reasonable remedy.

Additionally, the prohibition on foreclosing on covenant violation fines has left some of our clients without recourse for owners who are unwilling to maintain their properties to a minimum community standard after having been ordered by a court to maintain their properties and failing to do so after many months or even years. In those cases, the association is without recourse to deliver a solution to the community for a covenant problem that a judge has already determined needs to be remedied. This is not so much an economic impact to the association per se, but it is a potential impact on neighboring properties that might be up for sale and it begs the question of who has more rights-- the neighbor contemplating a loss in market value of his or her home or the owner who has steadfastly refused to maintain their property for months or even years? 

On the subject of covenant violations, while there are a number of procedural issues with 1137, the financial impact of the $500 maximum fine on a covenant violation not affecting the health and safety of the public stands out. It has been my experience that violation fines can be one of several effective tools to gain compliance. However, for many communities, a $500 maximum fine takes that nonjudicial tool off the table. Said another way, there are some owners who would gladly pay the fine to remain out of compliance. This has the unintended consequence of increasing the possibility that an association would have to pursue a covenant violation lawsuit because the association was prohibited by law from getting the owner’s attention to remedy the violation through violation fines. 

From my perspective, much of the hysteria surrounding the adoption of 1137 has not come to pass-at least so far. The burden of complying with 1137 has scared a number of self-managed boards out of being self-managed and has caused management companies, for the most part, to pass on those costs to their clients. I have heard of very few and isolated reports of people abusing the language option contained within 1137. The designated contact for communication has been a positive development. New conversations about how to address community issues amicably and inexpensively have taken place. 

The true financial impact of 1137 that I worry about has not yet been felt on a grand scale. Specifically, I’m referring to the eighteen-month payment plan. We’ve had a number of hailstorms throughout Colorado this summer, and there will be deductible apportionments/special assessments as a result. For those owners who have not protected themselves adequately with HO6 loss assessment coverage or otherwise, if they choose to pay the assessment over eighteen months in any appreciable number, associations are going to be strained in funding necessary infrastructure repairs. When that happens, I think that we will understand that the pendulum has swung a little too far out of balance for the health of associations that maintain critical infrastructure.

David Graf has practiced community association law exclusively since 2001. Regarded as one of the most sought-after community association industry speakers in the United States, David has been recognized for several awards, notable CAI’s National Educator of the Year (2015). David has been admitted to the College of Community Association Lawyers (“CCAL” or the “College”). In 2018 and 2020, David was elected by his CCAL peers to the College’s Board of Governors and is the current President of the College.

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