 Welcome to the Kondo Insider Show, the show where we talk about association living. Today we're going to be clarifying a very hot topic, the hot topic of Act 192. In other words, clarification of the priority of payment. We have an expert on our show today. Welcome back, Jane. And Jane can talk to us about the history as well as the need for the priority of payment policy. Right. And this has been kind of controversial recently because there was that bill about non-judicial foreclosure. And I think people kind of get them mixed up and they said, oh well, yeah, the priority of payments had to do with a lot of foreclosures happening. I guess it did have something to do with foreclosures and we're going to explain how that interacted. And because the priority of payments was repealed in an act that happened, not this session, but last session, 195. And I will explain why that had to happen. Yeah. Yeah. That was going to be my next question, like maybe give the history of what led to that and then how we got from 195 to 192. Right. So, yeah, I'd be happy to do that. Okay. Okay. So, you know, like I said, Act 195 was passed last year and what that did is it repealed the priority of payments policy. And people said, well, what's that? Yeah. And even to take a step back from that, I think what we should also speak about a little bit is exactly what is the priority of payment? What does that mean? You're right. Priority payments was a method for the associations because associations collect maintenance fees, right? Right. And it was a way for the associations to collect late charges and interest and fines and attorney's fees and things like that. And you may say, well, you know, why did they have to put in a method? And it was because, you know, with associations and, you know, many people are familiar with this, when they pay their maintenance fees, they do it on an automatic payment plan, like a sure pay. Because it's easy. Yeah. You sign the paperwork and you send it in and every month they just deduct it from your bank account, right? And so most property managers, you know, have programs where homeowners can sign up and have their maintenance fees paid automatically. And very few, you know, use the coupons that are given by the management companies. And the coupon means that you get a coupon for your maintenance fees because the associations determine the maintenance fees on an annual basis. Right. Because they're budgeted in the fall, they send out notices in December that say, okay, come January 1, this is your maintenance fee for the next year. Right. And at that same time, if you're not on a sure pay or an automatic payment plan, you get coupons. And then you can send in your coupons with your payment to the management company for your maintenance fees. Now, the statute, but the statute, you know, when I talk about the statute, I'm talking about 514A and then 514B in 2006. But those are the two condo statutes. But it didn't change. The statute talks about what is your maintenance fees. And the maintenance fees is what is typically called your common expense payments. So if you read the statute, you read 514A and 514B, and there's lots of statutes about, you know, how do you pay your maintenance fees? How is it determined? You know, when can they change it? How can they increase it? They don't talk about maintenance fees. They talk about common expense payments. Yes. Okay. So common expense payments means that, you know, the association, what they do is they add up all the costs that it takes to run the building. The electricity, the water, employees, the insurance, you know, the repairs. And they come up with a budget. And if you've got 100 people who live in that building, they take that budget, divide it by 100, and then figure out what the monthly charges are. And those are just estimates. And then they've got to add in some, you know, contingencies and reserves. Right. And so it's always an estimate. And then so then the unit owners get the notices that your maintenance fee for the next year is now $500. Yeah. Okay. And then so they're told to send in these payments. Yeah. But those payments don't include late charges or interest and those kinds of charges. And so what happened was... And they shouldn't. They shouldn't. You shouldn't budget for late fees and things like that. But what happened is that when you've got this many people living in a building, you're going to... You're going to, yeah. ...have some delinquencies. Right. And it just...it was just cost...it was not cost-efficient, you know, for the property managers to write letters. They'll say, oh, you know, you missed your payment. Now you owe us a $25 late charge, you know, the labor and the cost of writing these letters. And so they...after a while, you know, the associations and their attorneys went to the legislature and said, oh, can you help us? And what we want is we want you to set up a statute that says that we can determine priority of payments. And so when the payments come in, the association can say, okay, with that money, we apply it in a certain order, right? In a certain priority. And we can apply it to late charges and then interest and attorney's fees and finally to the common expense payments. Right. It's interesting that that's how it was initially devised or I shouldn't say devised. The statutes gave the associations the authority to set up the priority of payment. But it's interesting that across the board, it became late fees, legal fees, fines ahead of the maintenance fees in the past. Right. Because those weren't included. But the statute also said, if you do this, you need to have the board of directors meet and adopt a policy that says that your priority of payments will be first to late charges, interest, attorneys. And it's in the statute that way. So naturally, the board would just take that language to a resolution. You've got nine members on a board. All you need is the majority vote. And once you adopt that resolution, the statute says you have to notify all your owners. Yes. And that's important too, notifying all of your owners. But the statute, that portion of the statute was originally passed back in the 90s. That long ago. Yeah, that long ago. It was back in the 90s. And so what happened over a period of time, the units get bought and sold. Right. So let's say you owned your unit in 1991. And so naturally, when your board adopted the policy in maybe 1992, and you got the notice, you had notice of that. That's what the board was going to do with your payments. But if you sold your unit in 1999, your buyers, unless you told them, or you gave them a copy of your letter, they didn't have a clue. Nobody told them that there was this priority of payments policy. It wouldn't become a product of the, in the escrow documents with the governing documents when you purchase your units. Ideally, I would think. Because it's not an amendment to the bylaws. Yeah. It's not a declaration. And so, and that's what, that's what a lot of the problems they got. And some property managers on an annual basis sent out notices, you know, with their budget, you know, notice. Yeah, we did. We made that kind of a company policy procedure, if you will. Right. Because otherwise, how are they going to know? And how are you going to be able to notify every new person who came in after adoption of the policy of what the policy was? And so if it wasn't a policy that was adopted by the association, it was up to the board to notify all the owners. And that includes the new owners who came in after the original initial adoption of the policy. Right. And that's what causes, that's what caused, you know, some of the problems that we're going to be talking about. And, but anyway, that's, that's how it started. And then so now you have a statute and you have, you know, people, and, you know, let's, and let me tell you where the problem begins. Let's say you're on sure pay. Right. That means your payments are being deducted automatically and your, your, your maintenance fees are $100. Okay. That's your common expense payment. And so they're deducting $100 out of your bank account. And for some reason, the association issues a fine against you. And it's a $25 fine. You get the notice, you, you know, and you don't pay the fine. Okay. That happens. The next maintenance fee payment that you make, they're going to deduct the $25 because that's the policy says we apply it to late charges, interest, fines, attorney's fees. Right. So your $25 gets deducted. And guess what? Now you're delinquent. Yes. And now you get a late charge. Right. And, and does the, does the association or their, their managing agents send you a letter saying you're delinquent? No. They don't because they say, oh no, but we don't have to because we gave them notice of thought policy. Right. And so once we give them notice, we don't have to give them any subsequent notices. They're supposed to know that. Well, it's a good practice to never ignore those notices. Right. And send in that extra payment. Right. Otherwise, like you said, that your sure pay payment is going to, in the past, go against the fine first or any other legal fees or whatever. It, your, it won't automatically take a larger amount from sure pay because like you said, those maintenance fees are kind of set in stone. And that's what it's going to subtract from your account every well to pay. And if you don't send in an additional payment, then like you said, you're going to be delinquent. And then therein lies the problem. It starts to compound every month until you address it. Right. I'll give you an example of, to show that it might not even be like a fine. I, I learned when I was, you know, advocating for a homeowner. And you know, the statute says that if you have a delinquency, you ask your association for an accounting, they have to give you an accounting. Okay. And so when, when, and, and, and this person who was referred to me by a legislator. And the bill that she had was something like $1,600. Okay. And $1,000 of it was what was, was they said was a delinquency because, because of the priority payments. What they did was they, when you go delinquent, right, they applied to that delinquency. And so it's never your delinquent. It's not applied to late charges or whatever it's applied to it. But then what shows up on the books is your late charges. What I found out is that the property management company is the one who has to trigger. They call the, they do something, but they contact the bank and they trigger a debit because they have authorization to do that on, you know, with short pay. And when I went back and when I contacted the property, I mean, the, the, the attorney who wrote the letter, I said, you know, we don't understand. We dispute this. You need to tell me how we got to $1,600. The $600 is 30 fees. So I need to know where the, how you got the $1,000. And so I went back two years, two years. That long ago. That, that, that, because I could look at it and it took me about 20 minutes, but you know, you'd go and what happened was in July of a year, two years prior, there was no debit. And, and then so, so, and then what happened the next month, there's a late fee because there was no debit. And that's not the homeowner's fault because the homeowner has no control over the debit. And for some reason, the person in the accounting department or the property manager never did the debit. So it's not showing up. And it shows up on the statement as, you know, there's no charge. There's no charge for it. So, and so when I asked the management company, oh, oh, well, that means that they didn't do the debit. I said, so you guys trigger that. You go to the bank and trigger or there's something that triggers that, that, that's how you get the automatic payment from the bank. Sure. Yeah. It's, it's. And then what happens. So now, now, because they didn't do that, your one month behind and then the next month, they do the debit. But now you're one month of common expense, plus $25 late charge, plus $1.50 for the interest. And, and, and this goes on. And then, and then after a while, you get attorney's fee. So now you get this $1,000 because you're all those months behind two years. It was $600 just a late fees. Two years is a long time. And because the amount, you know, really in terms of the, the, the late charges and stuff like that, because it was like under $1,000. They, you know, the property manager, I guess they, they consider it wasn't really a big deal. You know, of course it's a big, big deal. But what happens is by the time you get to the homeowners and, you know, they get this bill and it's like, what, what is this about? Yeah. Well, I find that that's why it's a, it's a good best practice for management companies to send out delinquency letters because it should never get to two years down the line. Right. If your, if your account is delinquent, then it would behoove the management company to get ahead of that and notify you that, hey, there's a delinquency on your account. And in this case, somebody should have walked and said, okay, it's our fault because we didn't debit for July of that year. That's why we didn't get the amount from sure pay. Instead of there's nothing, there's no charge. And then all of a sudden the next month, there's two maintenance fees. Yeah, that's, that's a, that's an anomaly. Right. That was a very strange situation. But to me, to blame the homeowner and to end up charging the homeowner $600 in attorney's fees. I mean, that's adding insult to injury. Yeah, yeah. Well, that's a good time for a break. Let's take a break and we'll be right back with more from Jane. Aloha. I'm Mellie James, host of Let's Mana Up. Tuesdays, every other Tuesday from 11 to 1130. This show is meant to dive into stories of local product entrepreneurs and how they're growing their companies from right here in Hawaii. I'm so thrilled to have our show kicked off. And so please join us on Tuesdays at 11 o'clock as we talk to local entrepreneurs and hear their stories. Hi guys, I'm your host, Lillian Cumick from Lillian's Vegan World. I come to you live every second Friday from 3pm. And this is the show where I talk about the plant-based lifestyle and veganism. So we go through recipes, some upcoming events, information about health, regarding your health. And just some ideas on how you can have a better lifestyle, eat healthier and have fun at the same time. So do join me. I look forward to seeing you and Aloha. Come back and thank you again for tuning in to our show today. Today we're speaking with Jane about priority of payments and Act 192 which led to 195 or I have that the other way around. 195 led to 192. All right, so we've talked a little bit about exactly what priority of payments are and how they came in to play, if you will. And let's talk about what happened two years ago that led us to today in terms of why there was a need to re-evaluate priority of payment. Okay, but there was a situation where there were foreclosures and people were complaining that a lot of the foreclosures had to do with priority of payments. And because the situation we talked about, about people not getting notice because it's short pay and even though the property managers and managing agents and the associations would say, well, the statute says we can do this and we don't have to give you notice because we gave you notice when we adopted the policy. Or maybe we gave you annual notices and so you should have known. So we don't have to give you notices when we actually do it. And what it does is it causes problems because if you're a homeowner and you signed up for sure pay, you just naturally assume that you're current unless somebody tells you you're not. And what happened is by the time they find out because the attorney is involved, you're usually into thousands of dollars. And that leads to foreclosures. Yeah. But once the attorney is involved, before we even get to the foreclosure process, I find that in many instances, even the attorney letters went unaddressed, if you will. Yeah. There's a step in a protocol to everything, but somehow it becomes a bigger problem once we're at thousands of dollars and that should never be. And that's why even though there are statutes that say we don't have to notify you, we notify you once, some of this could have been eliminated just by opening your mail or the management company just saying, hey, you're past due and these are the reasons why. Yeah. And I think what that says is that people need to communicate. Yeah. And that means that owners have to open their mail and read it. Yes. They have to open their mail and read it. Yeah. And they have to respond. Respond. And the association on their side have to respond back and not bury their head in the sand and say, talk to my lawyer. Yeah. I mean, that's not communicating. Right. Because a lot of times talking to the attorney is worse because they don't talk English. You know, they talk in, you know, legal gobbledygook. Yeah, no. It's scary. In terms are not. It's, you know, it's scary and it's threatening. And so, you know, so you have these situations and, you know, where there's a lack of communication. And maybe basically that's what it is. It was a lack of communication. And, you know, by the time the homeowner, you know, realizes that there's a delinquency. I mean, they're, you know, it's a large amount. And then they're fighting with the lawyer. And meanwhile it's accruing and gets larger. And when they finally get, you know, the, when they finally figure it out, they figured, okay. I'm, you know, my, my sure pay is paying this, but it's not being applied because it's showing it's going to the late charges. And so if it went just to the common expenses, then my late charges and whatever, whatever are the 6000 or the 2000 or whatever the lead delinquency. It's not the common expense because I've been paying the common expense. And if my maintenance fees, my monthly payments were applied only to the common expense. I'd only be owning these other fees and they can't foreclose on those fees. That was my next question. You cannot foreclose on late charges, fines and attorney's fees. So, so, so if you do the priority of payments, is that, you know, those your maintenance fees or your common expense payments that you send in every month. Get applied to those charges first. That's why, you know, that's why the, the, the, the legislator who was, who was Senator Ross Baker finally said, okay, I can see what the problem is. We're getting rid of the priority of payments because that's the problem. That is the problem. And you can't apply those monthly pay, you can only apply those monthly payments to common expense payments. And yet, we're not saying you can't go after late charges, fines and attorney's fees. But you need to go after them another way. You can't take them. Yeah, that was my next question. What recourse do they have for these? You can sue the homeowner and get a judgment and garnish the payment. You can go, if they're working, you can garnish their wages. You can garnish their bank account. You can do that for fines. You can do that for fines. Okay. But it's, you know, but usually the fines are a couple hundred dollars. And for the legal fees, and it's usually a small claim thing. It's not worth it. You know, and that's why, you know, a lot of the associations, they start to do the priority payments because it's easier. Right, right. And they're in a little bit of a quandary because often times, in my experience, there are sometimes homeowners that say, ah, I'm not going to, I'm just not going to pay the fine. But the thing of it is too, you know, any payments that you owe the association are an automatic lien. And that means when you sell your unit and your association reports it to escrow, they can recover it out of the escrow. Good point. But the problem is, is if you're- You can never leave? You can never leave. You know, the association never gets paid. Yeah. You know, and the thing, and if you, you know, and if you reduce it to a lien, you've got to initiate collection against it within six months. Otherwise it goes away. Oh. Okay, I didn't realize that. Oh, and then it becomes even more complicated. In other words, if you have a debt, you need to pursue it. Yeah. I just let it hang around and, because it will go away. But it needs to be substantially worth it to go after, because like you said, there are legal fees or collection fees, and these things may outweigh the, you know, the need to go after for a couple hundred bucks. But even before the priority of payments policy, the statute always said you couldn't do foreclosure on late charges, interest attorneys fees. You could only do foreclosure on default of payments. Maintenance fees. And that's why they set up the priority of payment to pay everything first. Right. And then that would leave the maintenance fees out there so that we could go after you through and foreclose if need be. And that was happening a lot, I assume, and that's why. And so 195, which was passed last year, all it did was repeal the priority of payments policy. And oh, you can't do that anymore. No more. But they didn't clarify. They didn't clarify. How do you handle going forward? It was like, don't do it anymore. We're not going to tell you what to do. Right. And that's why 192 had to be passed. Got it. Okay. Because after the priority of payments, there are other things that came into play. Like with, due to the technology, you had buildings who were doing submetering, electrical submarine, right? So that each unit had their own meter in it. And that was, you know, but it was being paid off of the common electrical bill. Right. And then they were getting their own bills and being charged. Now that was, you know, that's, you know, like allocation of a common expense. And then there was, and then a couple of you, in the early 2000s, there was, you could adopt the insurance policy. I remember that. Where everybody could have their own 806 policy and that way they wouldn't make claims on the master policy. Right. Right. And everybody was told, you know, with all the water leakages and everything else, you know, I remember that. Right? So that's the reason why, you know, people were told, everybody's got to get an 806. And then finally, finally, there was a statute that said, you can, you can make, you can, You can, you can mandate, right? You can mandate. And so, but you had to have 50% of the unit owners agree to adopt such a policy. Right. That the building would mandate that everybody would have an 806 policy. And those policies are really cheap. They're like less than $300 a year. Right. But they are an administrative nightmare to manage. Like, let's say if we mandate that you have an 806 policy and you said, I'm not gonna, and then the association would go out and purchase for you and then it would charge your account for that insurance policy. And it became kind of an administrative nightmare as well. So that's like a common expense payment. And there are other things that are common expense payments. And so that's why 192 has to be to clarify, to adopt it and say, okay, you can, you know, because all of that is built into your budget and people are then notified that this is your maintenance fee based on certain things. And then they're told that you have to pay your own submeter charges. Right. Once, when the electrical meter is going, everybody's told, here's the meter where, you know, we're gonna measure it every month and you're gonna be charged the actual amount you use, which is a lot better for most people instead of paying on a pro-rata basis. And so it's only fair that you pay it. You pay it for your own usage. Yeah. And since those types of charges weren't included in the statute for the definition of common expense, now under bill 92, each building can then now do their own priority of payments policy and put in those things that they've adopted. If they have sub-metering, they can add sub-metering to the priority of payments. In other words, common expenses plus sub-metering, plus HO6 premiums, plus whatever, you know, if there's a special assessment that everybody's got to pay, include that. And then, but at the end, is where you add late charges, interest, attorney's fees and fines. They have to be the very last items on your list of priorities, not the first. But maintenance fees are the only thing you can legally foreclose on. So if you pay your maintenance fees, wonderful, but you don't pay your sub-metering and your cable or it's combined. Yeah, it's combined because it's a common expense. So there's no way around it, so it becomes part of your maintenance fee. Right. Okay. It becomes built-in, if you will. And so that's why we needed 192. Yeah. Right. Because otherwise, you know, it was confusing to some. It was very confusing. About whether or not you can bill for that or whether you couldn't bill for that. And because so many buildings, you know, have the sub-metering, you know, in their buildings and they had it before at 195, and, you know, they had the HO6 policy, now there was no way for them to recover those payments. Exactly. Right. So that's why we had to do the 192 so that we could clarify the problem. It's a fun process. Yeah. And, you know, but this is, you know, to me this is a good thing for the unit owners because now, you know, hopefully because, you know, you can't apply the common expense payments to things like late charges, fines, interest in attorney's fees, that, you know, the, if they are in a foreclosure, it's because they haven't paid their common expenses, which they're supposed to do under their governing documents. Right. Yeah. And, you know, so now, you know, we can avoid any more of those so-called abuses because now we're not, you know, hunting every month to make sure that, you know, the payments are... Passed correctly and applied correctly. Right. And none of it is being applied to late charges... To late charges. ...to interest attorney's fees and fines. That's the good thing. That's the good thing. Mm-hmm. That's the good thing. And I think a lot of people don't understand it and that's why they were testifying so vigorously for the nonjudicial foreclosure because they assumed that the nonjudicial foreclosures were being based on this priority payments, but it's not anymore. Yeah. It cannot be anymore. Well, interesting topic. Very necessary legislation and we could go on and on. Moral of the story. Open your mail and respond. And communicate. And communicate. And both sides have to communicate. Yeah. Thank you. Thank you. And thank you for joining us for a very enlightening topic and please join us again. Again, my name is Cheryl Franklin and my guest is Jane Suzumahara. Thank you again. Bye-bye.