Don't Be So Quick To Cash That Check - Restrictive Endorsements

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With the rise in the number of homeowners that are becoming delinquent on their assessments, management companies and homeowners associations alike more and more frequently have to deal with the problem of “restrictive endorsements” being placed upon checks that are written to pay for assessments.  A restrictive endorsement is an indication sent with, or written on the payment, that either defines what the check is written for (such as Assessments for June, July and August) or specifically states that it resolves all outstanding amounts owed. For example, it is becoming increasingly common for homeowners to send in checks that include language indicating that cashing and depositing the check will operate as a release of all claims against the owner.


Restrictive endorsements can be made in several different manners. The most common method by far is a “payment in full” notation written on the front of the check, typically in the memo line. Some endorsements are written on the back of the check or in a note or letter accompanying the check. While the exact wording or location of the restrictive endorsement is not necessarily significant, the result of depositing the check certainly could be.


So, what do you do if you receive a check containing a restrictive endorsement? Can you safely cash the check and still have the right to pursue the owner for the remaining balance due? Turning down a payment, especially on a delinquent account, is often times difficult to do. Bear in mind that by depositing the check you will likely either have to write off the balance of the account, or incur additional attorneys fees in litigation to determine whether acceptance of the check indeed satisfies the debt. The association has two options when a check containing a restrictive endorsement is received: (1) reject the check and continue efforts to collect the total balance due or (2) cash the check and be prepared to waive any claim to the remaining balance. If a decision is made not to accept or deposit the check, it should be immediately returned to the homeowner.


Courts have determined that simply crossing out the restrictive language is not valid in nullifying the effective of the restriction.


Associations may have an argument if a restrictively endorsed check is cashed through the management company lock box, or sent directly to the bank. These checks are normally cashed without anyone looking at them. Under the Uniform Commercial Code, the association should take the position that the payment was accepted without any knowledge of the restrictive endorsement and that acceptance of the payment was accidentally.  In circumstances such as these, immediately after becoming aware of the restriction (either through a bank copy of the check or via information from the homeowner), the association should return the amount tendered to the homeowner in order to revoke acceptance of the payment.


Our recommendation is that associations should not cash checks that are for less than the amount owed and contain any language that could restrict the associations right to collect all delinquent assessments, including late charges, interest, and attorney’s fees.