Arresting Arrears

Maintenance or common charge payments, along with assessments, are the lifeblood of your cooperative or condominium. When shareholders or unit-owners fail to pay on time, a building can get into serious trouble.

In a co-op or condo, every time one person is in arrears, everyone else has to pay more. In a large building, one defaulting shareholder is more of a nuisance than a crisis; but in a 10-unit building with apartments of equivalent size, each shareholder would have to pay an additional 11 percent each month to cover for a single non-paying shareholder. When there are multiple shareholders in arrears, the entire building could go under.

Here are four warning signs on arrears – and ways to deal with them:

1 Warning Sign: A significant number of residents are late or do not pay their maintenance or common charges. If you have a great number of people who bought their apartments in the 1960s, they may have trouble paying because they’re on fixed incomes and an increase in operating costs and a subsequent increase in maintenance has made it impossible for them to keep up.

The Solution: There are limits to the ways the operating costs of a co-op or condo can be reduced. As a rule, more than 85 percent of the operating costs are fixed, including debt service, payroll, real estate taxes, fuel, and repairs. Is there a way of reducing the remaining discretionary operating costs so the owners can pay less? Perhaps the arrearages are caused by a decision by the board to fund capital improvements from cash flow rather than a mortgage refinancing or a loan from the contractor. You might consider changing this.

2 Warning Sign: One resident refuses to pay every month and fights you in court. I have represented a co-op for 30 years where one shareholder has been in arrears at least 80 percent of the time. He has probably paid as much in late fees, interest, and court costs over the years as in maintenance. In this 80-unit building his behavior has been an annoyance, but it has never threatened the stability of the corporation, nor has it caused the board and the 79 other shareholders to lose any sleep. But what if eight more shareholders did the same thing?

The Solution: The larger the problem, the more serious your response. After a set number of arrearages, don’t fool around. In a co-op, seek out the shareholder’s mortgage holder. Rather than lose the apartment in a foreclosure action, chances are the lender will bring the resident’s account up to date. In a condo, the board must act aggressively by placing a lien against the unit, collecting rent from any tenant in the unit, and curtailing services to the residents of the unit.

3 Warning Sign: A significant number of residents are late or do not pay special assessments. Significant arrearages – particularly as a result of a large assessment or substantial, though limited, increase in maintenance or common charges to fund capital improvements – are a warning sign that should be addressed.

The Solution: If the board has taken an action and finds that there are multiple defaults as a result of it, the board should re-examine its action. You may want to investigate whether you are undertaking too many projects. I have represented several boards that, when faced with exorbitant capital expenses, have established funding mechanisms for shareholders who could not afford to pay immediately. These include drawing on the building’s line of credit and making loans to shareholders who needed help.

4 Warning Sign: Large numbers of shareholders or unit-owners are withholding their maintenance, common charges, or assessments because of a perceived problem with the building. This is an important warning sign and requires an investigation. The problem may be repeated leaks that are not addressed; sections of the building that are not heated in the winter or cooled in the summer (in buildings with central air-conditioning systems); or some other dangerous, but unaddressed condition.

The Solution: Shareholders and unit-owners should never withhold their maintenance, common charges, or assessments. Sometimes, however, this is the only way they can draw the board’s attention to the seriousness of a situation. I am not suggesting that the shareholders or unit-owners are correct in withholding their payments, but rather that the board should have addressed their complaints before the shareholders and unit-owners used civil disobedience to get their message across. The board should correct the problem, apologize for allowing the situation to reach this point, and then chastise the shareholders and unit-owners for not making their payments. The problem is not that the board is uncaring or corrupt, but sometimes boards are unaware that the condition exists.