By Joan E. Lewis-Heard, Esq.
Senior Associate; SwedelsonGottlieb
For those community associations whose CC&Rs provide for assignment of rents from a tenant in the event an association owner who is renting their unit or home is delinquent in the payment of assessments, an association may collect the rent directly from the tenant to pay delinquent assessments.
If done properly, this can be done without a court order or the expense of a court appointed receiver. In order to do this, the following is required: 1) the CC&Rs must have an assignment of rents clause; 2) a lien for the delinquent assessments should be recorded to secure the debt; and 3) a statutory Demand to Pay Rent to a Party Other than Landlord, pursuant to Section 2938 of the Civil Code, is required to be delivered by mail or by hand to each tenant of the property and the landlord/owner. Follow this link for the required text of the demand to pay rent to party other than landlord.
It is an important part of the process for the association to take all of the steps necessary to record a Notice of Delinquent Assessment (Lien). Once the Lien is recorded, this gives the Association “secured party” status and hence, the Association would be considered the “secured party” pursuant to the Lien and the “assignee” pursuant to the assignment of rents provision in the CC&Rs.
Throughout the process, it is most important that close attention is paid to: 1) statutory obligations; 2) the association’s CC&Rs assignment of rents provision; 3) securing the indebtedness, i.e., by recording a Lien should your association’s CC&Rs allow same; and 4) by making sure that both the tenant and landlord/owner are notified when the assessments are brought current such that the assignment of rents should no longer be in effect.
Further, pursuant to Civil Code Section 2938(g), if the association enforces the assignment by way of a Demand to Pay Rent (without the appointment of a receiver) and the tenant complies, the delinquent landlord/owner may make written demand upon the association to pay the reasonable costs of protecting and preserving the property, including payment of taxes and insurance and compliance with Building and Safety codes, if any. The association’s obligations under this provision cannot exceed the amount of rents received pursuant to the assignment. Therefore, the association’s obligation to protect the property by payment of taxes and insurance, etc. does not exceed the amount that it actually receives pursuant to the assignment of rents.
It is important for an association, prior to the time a landlord/owner becomes delinquent, to obtain a copy of the lease agreements landlord/owners have with their tenants. As an aside, it is important that the lease agreement generally incorporate the association’s governing documents and that the tenant agrees to abide by same. More importantly with respect to an assignment of rents, the association would have no real way of knowing how much rent to expect in the event of an assignment of rents if the association does not have a copy of the lease agreement. For instance, the tenant could say “I’m just paying $200 in rent,” when in actuality they are paying $2,000 in rent, still paying $1,800 to the landlord/owner and only paying $200 to the association pursuant to the assignment.
Bottom line, the procedure is properly completed, the assignment of rents provision, if contained in the CC&Rs, is a powerful tool to collect past-due assessments without the need for court intervention. However, if not done properly, it can raise threats of tort liability against the association by the landlord/owner such as interference with contract, etc. While threats of legal action and actual legal action may still be the result even if the assignment of rents is done properly, the association would have an appropriate defense to that action and the appropriate legal grounds upon which to have a court order the assignment of rents pursuant to Civil Code Section 2938.
If your CC&Rs do not have an assignment of rents provision, you may want to consider amending your CC&Rs.
For help with the assignment of rents procedure, contact Joan Lewis-Heard at SwedelsonGottlieb at 800-372-2207.