Collecting Condo Arrears - Gallet Dreyer & Berkey

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Marc Luxemburg, Partner, Gallet Dreyer & Berkey. How can a condo board collect unpaid common charges arrears from unit-owners?

BACKSTORY This tale is common in today’s difficult economy. Business has significantly slowed for the self-employed owner of a two-bedroom condominium unit. Sales are down and his income has decreased. As a consequence, he has fallen behind in the payment of the common charges on his unit. While there are many variations on the cause of the unit-owner’s inability to pay, the bottom line for the board of managers is the same: no revenue is being collected from the unit. In this particular case, the board of managers filed a continuing lien against the unit for the unpaid balance, and sent a letter to the unit-owner demanding that he bring his account current. Unfortunately, the unit-owner did not have the means to do so.

After months had gone by, the board began an action to foreclose upon the lien and to appoint a receiver to sell the unit and recover the arrears. After the complaint was served, the owner sought to resolve the action by offering to make monthly payments. The board considered the value of the unit and also that the unit had a mortgage – the balance of which would be paid before the board’s common charge lien in any sale of the unit.

Those facts, coupled with the additional time and legal expense involved in pursuing the foreclosure action and the uncertainty of any payment, led the board to have us negotiate a settlement agreement with the unit-owner. The terms of the settlement agreement included the unit-owner paying the attorneys’ fees incurred in connection with the owner’s default as well as the arrears amount; a significant upfront payment by the unit-owner toward the arrears; a confession of judgment for the remaining balance to be held in escrow by the attorneys for the board; scheduled monthly payments in reduction of the arrears; timely payment of all future common charges; suspension of the imposition of late fees and accrual of interest on the arrears; and entry of judgment in favor of the condominium in the event of any default by the unit-owner of the terms of the stipulation, including the failure to make any payment.

COMMENT The collection of unpaid common charges from unit-owners is complicated because the Real Property Law does not always give the condominium priority to receive the proceeds of a foreclosure sale of an apartment. Instead, the proceeds must first be applied to the amount owed to a bank on a first mortgage of record. Thus, unless the value of the unit exceeds the amount owed on the mortgage, the condominium is in danger of not being able to collect its arrears (this is just the reverse of the situation in a cooperative, where the Uniform Commercial Code provides that the cooperative has priority over a bank to the proceeds of a sale of a cooperative apartment).

The board has a number of weapons that it can employ to maximize its ability to recover payment. First, the board is entitled to file a lien on the unit. It is essential that the board do this for several reasons. Among them: it allows the board to bring an action for foreclosure and force the issue if the bank is not taking effective action. It is also essential to file a lien in order to be able to recover the surplus money proceeds from any sale that might be conducted by a bank in a foreclosure action.

If the unit is occupied by a tenant, the board has the right to send a notice to the tenant demanding that the tenant pay the rent directly to the board instead of the unit-owner. The board can also apply in a foreclosure proceeding to have a receiver appointed to rent the unit (or to collect market rent from the occupying unit-owner) and apply the proceeds to the unpaid arrears. Even though the unit-owner may take no steps to try to resolve the situation voluntarily, the start of a foreclosure action by the board will frequently have the effect of forcing the unit-owner to the negotiating table to resolve the situation by agreement. This allows the unit-owner an opportunity to voluntarily resolve the matter on a financial basis that is within his ability, and allows the board to forego the time and expense of extended legal proceedings, which, in the case of a foreclosure, may drag on for years.

From the Desk of ML:

I’m very proud of the verdict in a pro bono case that I successfully argued for the Council of New York Cooperatives, which established that a board member is not personally liable for the actions he or she takes as a board member.