Condo Arrears

When a condo board goes after a unit-owner who is in arrears, that’s a serious move. What do they need to consider before making their decision?

First, they need to see if the owner has a mortgage on the unit, what the amount is, and whether the owner is paying it, because if the owner is not paying their common charges, they might not be paying their mortgage payments either. The bank’s lien has priority over the condominium's lien. You wouldn't want to spend money on a foreclosure and then have the bank come in, take the property and knock you out of the box.

You represent a condo that was faced with this problem.

Yes. The owners were in arrears for a year or more and were leasing their unit to tenants. They were basically using it as an income property. We looked at the mortgage and found the balance wasn’t that high, which was a good thing. If the condo foreclosed on the unit and sold it, the bank lien was small enough so that the condo would still recoup the money owed to them. It made sense financially.

How did the board proceed?

We started a lien foreclosure and checked after a few months to see whether the owners were still in good standing with their mortgage. If a bank and condominium are both completing a foreclosure action and the bank is just a step behind you, sometimes it makes sense to let them move first so you don’t spend the money up front and then see the bank take ownership right after.

Was that the case here?

Yes, so we pumped the brakes on the foreclosure action a little bit. Then the owners worked out a loan modification, and the bank stopped its foreclosure. At that point, it made sense to complete our action and sell. There was enough equity there to make the property attractive for a buyer or investor. However, it wasn’t as smooth a process as we would have liked because one of the owners declared bankruptcy after we had obtained a judgment of sale and foreclosure and had started advertising the unit for sale.

A pretty big glitch.

We made an application to the court, because savvy debtors will file for bankruptcy but not complete their repayment plan and then file for bankruptcy again. It’s a stall tactic, and if you're not familiar with bankruptcy law, you can get taken advantage of. Sure enough, this owner wasn’t completing the plan properly, so we petitioned the court and said, “If they file a subsequent bankruptcy, it shouldn't affect our sale.” Their bankruptcy case was dismissed, and we re-noticed the foreclosure. Once again, right before the sale date, they filed for bankruptcy, but we already had the court order protecting us.

You were able to complete the sale.

Yes. We recouped all the money owed to the condominium and got the added bonus of a new unit owner who is paying their common charges and not using the unit as an ATM.

So, to sum up, if the equity's there, it makes sense to go after an owner, but if not, you should back away.

The other thing to keep in mind is that bankruptcy isn't necessarily a black hole. Owners often have a legitimate reason for declaring bankruptcy, and the courts will try to shepherd through a legitimate payment plan. However, they take it very seriously when someone files a bogus bankruptcy and will actually support the creditors in that case.