In July 2016, the Georgia Court of Appeals released an opinion in Northside Bank v. Mountainbrook of Bartow County Homeowners Association, Inc., which may have significant implications for homeowners associations not submitted to the Georgia Property Owners’ Association Act (“POA”). Specifically, the case involves limitations on the percentage of interest and the amount of late fees that a homeowners association may assess delinquent owners.
In Mountainbrook, a bank failed to pay assessments after it foreclosed and took title on six lots in the Mountainbrook subdivision. Two years later, the homeowners association filed suit against the bank to foreclose on its liens and to collect unpaid assessments, interest, late fees and attorneys’ fees. The trial court ruled in favor of the homeowners association and the bank appealed. The Georgia Court of Appeals reversed the trial court’s decision in part, holding that the homeowners association was limited to collecting a maximum of 7% percent interest on delinquent assessments instead of 18%percent, which is the amount commonly sought based on Georgia statute and prior case law. The Court of Appeals also held that the homeowners association was not entitled to recover late fees in the amount of 10%because the association’s declaration was silent on the amount of late fees that could be assessed.
With regard to interest, Mountainbrook’s declaration stated that delinquent assessments would bear interest from the date of delinquency at the “maximum legal rate per annum.” It interpreted 18% as the “maximum legal rate” because of a Georgia statute and an older court opinion that deemed 18% as suitable for the obligation to pay money for the furnishing of goods and services. In Mountainbrook, the bank argued that the declaration was a contract and that a different statute governed the rate of interest in contracts where the interest rate is not specified. The Court agreed, and therefore, homeowners associations with similar assessment recovery language in their governing documents will now be limited to assessing a maximum of 7%interest, rather than 18%.
As for the late fees, Mountainbrook‘s declaration provided that the homeowners association could recover late charges on delinquent assessments “in an amount set by the Board.” Because this language provided the Board with total discretion to assess late fees in any amount, and because there was no set criteria for how the Board would determine them, the late fees assessed against the bank were deemed an impermissible penalty. Accordingly, any homeowners associations with a similarly worded late fee provision in their declaration would be prohibited from assessing such fees.
While the holding in Mountainbrook will absolutely have a detrimental effect on the collection practices of Georgia homeowners associations, there is a solution to address these limitations: adopting the POA. Not only does the POA afford homeowners associations with many useful tools to address delinquent assessments, it also contains a framework for covenant enforcement issues. Sometimes this may be as simple as the board adopting the POA. If the governing documents do not provide the board with unilateral authority to do so, however, an ownership vote would be required. Either way, homeowners associations submitted to the POA will want to ensure that the assessment provisions in their governing documents mirror those provided in the POA to ensure that they are authorized to charge the highest interest rate and late charges permitted by law.