Do not let the rogue Board – or any Board – fine you. It is unconstitutional!
THIS IS FROM AN ATTORNEY FROM THE [Arizona] Attorney General’S OFFICE!
From: Jerald Thompson [mailto:Jerald.Thompson@azag.gov]
Sent: Monday, January 31, 2005 12:02 PM
Subject: Re: Penalties/late fees
Yes and no. First, I agree with those Courts that hold any HOA “fine” as being unconstitutional. The ability to “fine” is an act of the sovereign that is circumscribed by the concept of due process. It cannot be delegated. HOAs toss out their “fines” with contempt towards the concept of due process. However, if you ask any CIA lawyer, they will tell you the fines are perfectly legal. That way, whenever anyone challenges the “fine,” the lawyer makes a lot of money. Shoot, they even make the money when the Association calls and says, “This guy says fines are illegal. Is he right?”
Contractual damages, on the other hand, seek to place the non-breaching party into the same position they would have been in, had the contract been properly performed. Of course, there are concepts such as “equal bargaining positions,” and negotiated provisions that outline contracts.
Using a straight contract analysis, whenever someone leaves their garbage can by the sidewalk two extra hours is to “cost” the Association something. That would be the measure of damages (assuming the contract was “bargained for”).
Whenever it’s difficult to ascertain damages (such as leaving a garbage can out too long), the parties can agree in advance to “liquidated damages” Those are the “damages” that the parties agree – in advance – for a particular breach. One common example is failure to complete a step in the construction project by a given time. It’s easier just to say the “damages” will be $500 per day.
But, as you point out, the liquidated damages must bear some resemblance to the actual damages. In my example, you have construction crews and material suppliers that are depending on the step being completed on time. $500 per day should be a “rough approximation” of the actual damages. $50 for a garbage can doesn’t pass the “ballpark” test.
The retort is usually “attorneys fees, etc.” Those are separate damages.
More importantly, what liquidated damages are NOT allowed to be, are “penalties.” If a Court feels a liquidated damage is really a “penalty,” it will likely not allow the amount to be collected.
The most important aspect of any of this, is the concept of “negotiation.” Obviously, no one gets to “negotiate” their CC&Rs. Most likely, there is some “reopener”; that says something like “we don’t have any terrible rules, but if we get the vote of 50% of the people, we can impose some.” The 50% turns into 50% of some minimal quorum, and presto – we now have “fines and penalties.” That’s what the CIA lawyers argue are “negotiations.”
Now that I’ve vented long enough. Late fees are a classic, proper, “liquidated damage.” Money is due on a particular day. Generally, the value of money is interest. However, there are also increased administrative expenses such as a call or letter reminding the late payer. It’s much easier to simply say $5 per day for each day the money isn’t paid, up to, say, $15. Now, if the “late fee” is $50 – you have the “liquidated damage” problem.
HOAs COULD justify all of this. If they really had their residents in mind, they WOULD. Some DO. MOST, however, hire these stupid management companies that see what was done over “there” (with a good HOA), and then say, that’s what we’ll do. Gee, they have a late fee of $15 over in Blissfull Acres. We should have one here in Devil’s Badlands. And why just $15? Why not $50? And why bother with seeing if the fee is compatible with the CC&Rs? It’s O.K. over in Blissful Acres – it should be O.K. here, too.
This is what happens when HOAs hire unlicensed management companies who then demand people have a third grade education before hiring them to manage a 2,000 unit development.
To sum. If properly constrained, and authorized, a “late fee” is generally O.K. A fine is not. That’s my opinion, and I’m sticking to it.