Chapter 14 ASSESSMENTS AND INCOME

JurisdictionNorth Carolina

14 ASSESSMENTS AND INCOME

§ 14.01. In General

Assessments are the life blood of almost all common interest communities. Owners often refer to them as "dues," but the concept is usually the same — a mandatory financial obligation on the part of the owner and member to the association by virtue of the owner's ownership of a lot or unit subject to the declaration. In a planned community and condominium, assessments are usually due whether the owner utilizes the association's amenities or accepts the benefits of membership in the association.1 There are a number of ways income may flow to an association. In addition to investment income, planned communities formed after 1999 and condominiums formed after 1986 (and those authorized to do so under their legal documents) can impose and receive any payments, fees, or charges for the use, rental, or operation of the common elements.2 Associations can impose reasonable charges for the preparation and recordation of amendments to the declaration, resale certificates, or statements of unpaid assessments.3 Planned communities can convey land subject to membership approval and have their land acquired by eminent domain.4 Both planned communities and condominiums can fine owners for violations of the restrictions and rules and regulations for the community.5 While these may be sources of income, they are either relatively small in nature or too sporadic to produce a reliable income stream for routine association operations.

Prior to the enactment of uniform legislation in North Carolina, owners' financial obligations to their associations were governed by an unclear common law and patchwork of random statutes, which resulted in almost as many challenged court cases as there were communities in North Carolina. In non-condominium settings with no specific statute to turn to, developer's counsel referred to "the next most analogous statute available" when referring to the associations' rights to collect and the members' duties to pay assessments. While the Unit Ownership Act has had some reference to owners contributing to the "expenses of administration" of the condominium for 50 years, the Unit Ownership Act's procedures for filing liens, foreclosure of those liens and attorneys' fees were inadequate for condominiums. The enactment of the PCA and the Condominium Act was helpful to owners and associations alike in that it gave a clear path to developers of the frameworks to use in setting up the financial obligations in the association's founding documents and filling in the missing pieces left unaddressed by the Unit Ownership Act. Both the PCA and Condominium Act refer to the owners' financial interests and obligation in the association occasionally as the "common expense liability."6 The phrase is derived from "common expense," which is defined in the PCA and the Condominium Act as "expenditures made by or financial liabilities of the association, together with any allocations to reserves."7 In other words, the "common expenses" are the lawful bills of the association, and the "common expense liability" is the owner's obligation to pay for those bills. These terms are also used throughout the PCA and the Condominium Act to determine the owners' interests in monies flowing from the association to owners such as in terminations and the return of surplus funds. Today, both the PCA and the Condominium Act contain detailed procedures that address the manner in which liens are filed, how foreclosures occur and attorneys' fees are assessed.

It is worthy of note that the PCA does not necessarily apply to commercial "planned communities."8 Thus, it is conceivable that the assessment obligations of townhome type office complexes or other "commercial" developments would be governed by statutes other than the PCA.9 In commercial communities not subject to the PCA or Condominium Act, the notice requirements, assessment increase amounts, voting requirements, special assessment provisions and the like may be governed by the legal documents for the community and whatever other statutes incorporated therein such as Article 2A of Chapter 45 of the General Statutes. By and large, however, most declarations in the past three decades have incorporated the provisions in the PCA and Condominium Act, which statutes have gone a long way towards stabilizing assessment collection, as well as protecting owners in North Carolina from unreasonable financial burdens. In 2013, the PCA and the Condominium Act were amended to specifically tie in the foreclosure procedures of Article 2A of Chapter 45 of the General Statutes.10

Under the PCA and the Condominium Act, the association's claim of lien is subordinate to liens and encumbrances, specifically including, but not limited to, a mortgage or deed of trust on the lot, recorded before the filing of the claim of lien in the office of the clerk of superior court.11 There is no "super-priority" lien in North Carolina or requirement for lenders to give notice to associations to preserve their lien rights, which has led to much litigation in other states.12

§ 14.02. Regular Assessments

Regular assessments are the normal, recurring financial obligations of owners in a homeowners or condominium association. They are typically paid monthly, quarterly or annually depending on the community. They are normally automatic and go into effect at the start of each calendar year. Unlike special assessments, they normally require no vote of the membership and are set by the board each year. Regular assessments for the common expenses have to be made at least annually under both the PCA and Condominium Act.13 Until a regular assessment is imposed, the developer has to pay all common expenses of the planned community or condominium.14 Once the developer has established an assessment, all the owners pay assessments for all lots or units owned.15

§ 14.03. Calculating Assessments in Planned Communities

The annual assessment obligation is typically calculated at the beginning of the year by the board taking the total association budget and determining each owner's proportionate share of the budget. The PCA defines the "common expense liability" as "the liability for common expenses allocated to each lot as permitted by this Chapter, the declaration or otherwise by law."16 In the beginning of the development, the declarant has to pay all common expenses of the development until an assessment is levied.17

With respect to regular assessments in planned communities, they are assessed against all the lots in accordance with the allocations set forth in the declaration.18 Normally in a planned community this is done by each lot paying the same amount. Even in townhome communities where the association may be responsible for a wide variety of exterior maintenance on townhomes, assessments are usually shared equally by all owners even though some townhomes may be far more expensive to maintain than others. While it may seem inequitable to some townhome owners to pay for expenses that are more than the expenses necessary to maintain his or her particular townhome, this is simply one of the fundamental characteristics of common interest community living. In fact, many early developers put provisions in their declarations making it quite clear that even though some townhomes required more money to maintain, the owners all paid the same assessment.

Example 14-1

As a matter of information to future members of this Association, the developers wish to make it known that it is a part of the original plan of development to construct a variety of dwellings with a variety of exteriors for the good of the entire subdivision. Some dwellings may require far more maintenance than others because of the types of exterior exposures. Nevertheless, in order to avoid monotony and in order to achieve a harmony of design and textures, all of those connected with the conception, design, construction and financing of this subdivision as originally planned, are in accord in their belief that all members of the Association will be benefited by the variety of exteriors and, therefore, the Association should provide exterior maintenance and make a uniform rate of charge without regard to the actual cost of maintenance of each dwelling.19

There are some exceptions to this uniformity requirement. For instance, if any common expense is caused by the negligence or misconduct of any lot owner or occupant, the association may assess that expense exclusively against that lot owner or occupant's lot.20 Additionally, common expenses associated with the maintenance, repair, or replacement of a limited common element may be assessed against the lots to which that limited common element is assigned, equally, or in any other proportion that the declaration provides.21 Another example of an instance where assessments would not be uniform in a planned community is when a developer deliberately sets up two or more classes of membership and assessment amounts for homes based on the amount of maintenance a particular section gets versus another section of the development. For example, a developer may require the owners of townhomes to pay at a different rate than owners of single family detached homes.22

§ 14.04. Calculating Assessments in Condominiums

Like planned communities, the annual assessment for condominiums is usually calculated at the beginning of the year with the board determining every owner's pro rata share of the total annual budget for the condominium. The Condominium Act defines the "common expense liability" as "the liability for common expenses allocated to each unit pursuant to G.S. 47C-2-107."23 N.C.G.S. § 47C-2-107 requires that the declaration allocate a fraction or percentage of undivided interests in the common elements and in the common expenses of the association and a portion of the votes in the association to each unit and state the formulas used to establish those allocations. Therefore, in a...

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