The Condo without First Refusals

In our forum, “Board Talk,” one condominium board member wonders who should pay the $25,000 arrears on an apartment that sold “at a decent below-market price?” The bank refuses to pay and the buyer “wants us to eat some of [the] arrears. The board feels the unit has cost us a lot of money and headaches so we should get paid full arrears.”

One reason for this condo board’s dilemma is that, incredibly, it has no right of first refusal – and nothing in the bylaws that allows it to vet purchasers for financial stability or anything else. “I had someone move in who was actually wanted by the police,” the board member wrote. “We also have no rules on smoking, pets, etc.,” he says. “I have no clue who the buyers are.”

Unfortunately, notes attorney John Van Der Tuin, a partner at Balber Pickard Maldonado & Van Der Tuin, that below-market sale dooms any reasonable hope of reimbursement for the arrears. “When a condo board has a lien on a unit for unpaid common charges, it is subordinate to a first-mortgage lien,” Van Der Tuin says. “If the bank forecloses because its mortgage is unpaid, the foreclosure wipes out the condo board’s lien.” Only if there is a surplus – that is, if the apartment sells for more than the remaining amount of the mortgage – is the condominium entitled to be paid its arrears.

“If there is no surplus” – making the transaction what’s known as a “short sale” – “the condo board is out of luck,” Van Der Tuin says. “Its lien is gone, and neither the bank nor the foreclosure-sale purchaser has any obligation to pay the unpaid common charges.”

Van Der Tuin says he cannot recall offhand any other condominium without the right of first refusal. But this property was incorporated in the 1970s, when New York City had mostly co-ops and few condos. “It’s not entirely surprising that a 1970s condominium plan would have some peculiarities to it,” Van Der Tuin says. “It was early in the condominium process in New York and the usual rules and market expectations for how a condominium should be organized weren’t as fully developed as they are now.”

Is there anything this beleaguered board can do? “You’ve got to look at the bylaws,” Van Der Tuin says. “If a condominium wants to tighten up its procedures, it can – to the extent and in the manner allowed by the bylaws. The board can enact bylaw amendments or house rules to impose restrictions on the purchase process, smoking, dogs, and other quality-of-life matters. But they have to look to the bylaws as to what can be done and how. Should they take a board vote? Unit-owner vote? Do they need a simple majority? A supermajority?”

Changes to the bylaws or house rules must be consistent with the existing bylaws. “It’s doable,” Van Der Tuin says, but it will take “a sustained effort and good representation and management.”