Apply Payments to Earliest Arrears

In debtor-creditor law, the general principle is that the creditor can decide how to apply payments received from the debtor. [Note however, that there may be an argument that the debtor has the right, in some instances, to specify how a payment from the debtor must be applied.]

In the condominium setting, dealing with an owner who is in arrears, it is normally best to apply the owner’s payments to the owner’s earliest arrears, for the following reason: The limitation periods (for collection) generally run from the date of the default. For instance,

• Lien rights expire unless the lien is registered within three months of the default; and
• Court claims, for recovery of unsecured arrears, generally must be started within two years from the default.

So, if an owner’s payments are applied to the earliest arrears, the “date of default” (for any outstanding amounts) will of course be more recent, and the limitation periods will therefore have later start dates.

To achieve this result, our recommendations are as follows:

1. To avoid arguments about your rights to apply payments to the earliest arrears, include a provision in your by-laws (stating that all payments are applied to the owner’s earliest arrears).
2. Whenever permitted, apply each payment to the earliest arrears (in each unit ledger).