Fee Simple: When a Fine Isn

When is a fine not a fine? When it’s an administrative charge, that’s when. Some may say that’s simply a question of semantics, but calling a fine a charge is not just double-talk. It may be your ticket to avoiding a legal challenge.

Most co-op and condo boards have put at least a few types of fines in place. The basic kinds of infractions that call for penalties include:

• Late payment of maintenance or common charges
• Breaking house rules
• Subleasing

Most co-op or condo owners don’t question late fees for maintenance payments, even though they may not know from where the board’s technical authority comes. According to Robert Grant, director of management at Midboro Management, the power arises from language in the proprietary lease allowing the corporation to collect interest at the highest prevailing rate on unpaid debts. Another portion of the lease (usually Paragraph 28), allows the corporation to be reimbursed for any reasonable costs incurred when curing a default. Paying maintenance late may harm a co-op’s ability to meet its underlying mortgage.

Many managers routinely charge late fees that are five percent of monthly maintenance, or even a fixed amount of $25 or $50. Some tack on an extra $3 a day, or even an extra $5 to $10 a day, over and above the basic fee until the money comes in. If payment is not forthcoming, many will start a nonpayment proceeding against a co-op shareholder; in the case of a condo, the agent will file a lien. Some co-ops will also stop a closing if fees are not paid; condos will not issue the required right of first refusal letter.

Grant claims such tactics skirt the edge of illegality. “Courts have already ruled that you can’t hold up the transfer of co-op shares or the [right of first refusal] condo letter, because of unpaid monies,” he says. “In a condo situation, you also can’t legally withhold services to punish an owner for non-payment of fees or charges. These would include such things as pool privileges and having grass cut. It may seem like a good way to get people’s attention, but the law is that if you have a non-payment, you take it to court as a non-payment action.”

This flies in the face of the current practice at many management firms, which make it standard operating procedure to withhold required documents at closings if fees are not paid.

So, after you put a schedule of fines in place, how do you justify them against the charge that they are arbitrary? That’s the question — and the reason Grant says that fines are out and administrative fees are in. As opposed to fines, which a co-op or condo may lack the technical right to impose, administrative fees are defensible, so long as they bear a reasonable relationship to the management company’s expense and effort in curing the problem.

Consider the case of an illegal sublet. Rather than just sending a letter to the owner saying that he owes the corporation a $500 fee for not seeking board approval, Grant’s strategy is to itemize the administrative costs of curing the behavior. Determining that an illegal sublet is taking place, then monitoring it, reporting it to the board, and performing required investigations are all costs incurred by the agent. If they add up to $500, that’s a defensible administrative charge which will hold up in court much more readily than would a simple dunning notice.

Since fines and fees often spark emotional reactions, it is important that the process be perceived as being fair all around, and that the recalcitrant owner have at least one forum to air his grievances and argue his case. Boards must be certain to tread lightly. Fines may seem simple but if not handled properly, they can become a Pandora’s Box of headaches.