The Upside of Small Claims Court

The Low-Down

The issue of arrears in condominiums is important because heavy arrears might make it harder for potential purchasers or existing unit-owners to refinance the mortgages on their units. Heavy arrears might also prevent a condo from taking out a line of credit or a loan to start a capital project. All those issues could also make units harder to sell, which could result in a decrease in sales prices.

You can’t evict a condo unit-owner who doesn’t pay common charges. You also can’t just shut off services. There is also no way to report a delinquency in common charges to one of the credit reporting bureaus. If a person doesn’t pay the common charges, it’s not going to affect his or her credit adversely unless the board sues and there’s actually a judgment against him or her.

The Weigh-In

When a unit-owner falls into arrears, a board has legal remedies – such as filing a lawsuit – and non-legal remedies. I’ve seen boards create lists of unit-owners in arrears and post them in common areas. We typically suggest that you don’t actually include the name or a specific amount, just the unit-number. Hopefully, this will be a community-wide deterrent: people won’t want to be on that list, so they’ll pay. You can also restrict some amenities, such as receiving packages, or limit access to a pool or a health club.

Another potential way to collect common charges without actually filing a lawsuit is by taking advantage of a statute, 339-KK of the Real Property Law. This allows a condo board to serve a notice for common charges directly on a sublessor. He or she is obligated to pay rent directly to the condominium, rather than to the absentee unit-owner. If you come to the point where a person is in arrears for more than 60 days of common charges – and you’ve tried some of the remedies mentioned – you need to sue the person for breach of contract. An alternative is to take a statutory remedy. You file a lien against the unit, then you foreclose on it as if you’re a lender foreclosing on a mortgage, which will enable you to ultimately take back the unit at a foreclosure sale.

The Outcome

With a breach of contract, one way to collect is to file a case with the small claims court. When you file, there’s a $5,000 jurisdiction limit, meaning you can’t collect more than that. The upside of getting a judgment against one person in small claims court is that even if he or she wants to sell a unit, or the unit would be lost in a lender foreclosure, the unit-owner would still be obligated to pay the debt after he or she lost home ownership; the judgment will stay in place and will show up on his or her credit report for 20 years.

With a lien foreclosure, you are starting a lawsuit against the unit and the person, and the source of payment will be the unit. The drawbacks of a lien foreclosure action are that it could take a couple of years and the legal fees are expensive. If a bank is also foreclosing for non-payment of the mortgage, ultimately that will wipe out whatever interest the condominium would have obtained in the unit through its own foreclosure.

The Take-Away

The most important thing for boards is to have their management companies send out notices to unit-owners who are more than 30 days in arrears. If the person does not respond after 60 days, you should have your attorney send a letter. If he or she still doesn’t respond, then it’s time to consider some non-legal recourse against the owner, and probably it’s also time to start a lawsuit. The longer you wait, the worse it will get.