SB 1531: Bad for HOAs. But Really, Really Bad for Homeowners

The Arizona Senate has introduced legislation, SB 1531, that will have the dual effect of harming both homeowners associations and homeowners. We urge everyone to contact your senators and representatives and urge them to vote NO on this SB 1531.

In order to appreciate the (presumably unintended) harmful effects of the legislature, it is important to first understand the current state of the law. Arizona law presently allows HOAs and condominium associations to foreclose if, and only if, assessments are unpaid for a period of one year or $1,200.00. Associations cannot foreclose for CC&R violation fines and all other amounts (late fees, collection charges, and attorneys’ fees) are excluded when calculating whether the $1,200.00 or one year threshold has been met. In addition, Arizona law requires that all payments must first be applied to unpaid assessments. This ensures that associations receive the money they are owed.

So how would SB 1531, if passed, change this? In several ways:

It would allow associations to apply payments to the “oldest” charge, including fines, collection charges, or unawarded attorneys’ fees. The proposed language: “All payments received…shall be applied to any unpaid amounts in the order the debt was accrued if those charges, costs, fees or other amounts are specifically authorized in the declaration.” Why is this bad:

  • It forces homeowners to pay older CC&R violation fines even if they dispute the validity of the violation or the reasonableness of the fine. The law presently requires an association to file a lawsuit, prove the violations exist, and establish that the fines are reasonable before collecing fines.

  • It forces homeowners to pay unawarded attorneys’ fees, in whatever amount the association’s attorney claims is owed. The law presently requires an association to request an award of attorneys’ fees and costs from a court, prove the fees are reasonable, and gives owners the right to challenge the fees as unreasonable or excessive.

  • It encourages HOA attorneys to run up attorneys’ fees, apply any payments received to those fees, and eventually file a lawsuit when the owner fails to pay all amounts demanded. This could result in the HOA never seeing a dime even where the owner is making regular payments. The law presently recognizes that assessments are important and the association should always be paid first before the lawyers, most of whom do not actually bill the associations.

When associations get to apply an owner’s payment first to fines or unawarded attorneys’ fees, this means that the payments are not being applied to assessments. The association is being deprived of its revenue stream and an owner would have to pay the disputed violation fines or all unawarded attorneys’ fees demanded In order to avoid foreclosure.

WE FIND IT HARD TO BELIEVE THAT THE ARIZONA LEGISLATURE WOULD DEPRIVE AN OWNER OF THE RIGHT TO CHALLENGE VIOLATIONS, FINES, OR UNAWARDED ATTORNEYS’ FEES AND GIVE HOAs AND ATTORNEYS THE MEANS TO FORCIBLY COLLECT THESE AMOUNTS UNDER THREAT OF FORECLOSURE.

SB 1531 also changes the statute of limitations for foreclosure actions from three to six years. Under current law, an association loses the right to foreclose for assessments that are more than three years old. When you factor in an association’s right to apply payments to the oldest first, this means that the threat of foreclosure will hang over an owner’s head for years.

The unintended consequences of SB 1531 far outweigh what few protections it might create for homeowners or associations. For example, it prohibits associations from providing statements to owners once a lawsuit is filed. The consequence of this is to allow the HOA attorney to run up legal fees providing documents that the Planned Community Act and the Condominium Act otherwise require associations to provide. It gives associations an incentive to impose fines and forces homeowners to file lawsuits to challenge them. In our experience, homeowners are often unaware of fines being placed on their account.

Perhaps the greatest unintended consequence relates to an owner’s ability to prevent foreclosure once a foreclosure action is filed by paying the amount of the unpaid assessments. Because SB 1531 would allow HOA attorneys to apply payments first to unawarded attorneys’ fees, an owner could be forced to pay all unawarded attorneys’ fees in addition to the unpaid assessments rather than pay the assessments and ask the Court to decide whether the attorneys’ fees being demanded are reasonable. The law is clear: courts, not HOA attorneys, get to decide what is a reasonable attorney fee.

We do not believe that the current law is perfect. Far from it, the current law has serious problems. But SB 1531 does not solve any of the current problems. It simply magnifies the existing problems and creates bigger problems. SB 1531 benefits management companies and HOA attorneys at the clear expense of homeowners and HOAs. Call your senators and representatives and urge them to vote NO to SB 1531.