Different Collection Tactics for Co-ops and Condos

Co-ops and condos have different tools to collect arrears.

The pandemic has not caused a spike in co-op shareholders and condo unit-owners falling behind on their monthly maintenance. But it does happen. What’s the best way for boards to go about collecting arrears?

First of all, the bible for the co-op is the proprietary lease. All of the rights of the shareholder-tenant and the co-op itself are contained in the bylaws and in the proprietary lease, mostly in the proprietary lease. Shareholders can fall into arrears on their monthly maintenance, late charges, legal fees, fines and so forth. 

There are two types of collections for the arrears: you can foreclose on your lien and sell the stock, or you can sue the party in an eviction proceeding, where you would be evicting the shareholder and asking for a monetary judgment and possession of the premises. When that happens, the tenant is still responsible for the maintenance charges.

As far as the foreclosure is concerned, the board can start a nonpayment proceeding after the fifth or the 10th of the month, depending on what the lease says. The board would serve a 14-day notice, and at the end of that period, it could serve a petition, which would put the case in court in 12 to 17 days. Once the board gets a judgment and attempts to sell the shares of stock, it is responsible to also notify any underlying mortgage or lien holder on the property, if the party purchased the property subject to a lien with a bank. The board signed a recognition agreement, agreeing to let the bank know of any arrears. And the bank has the opportunity to come in and satisfy the arrears. Banks usually do that because the bank is second in line to a co-op. If the co-op continues till the end and does the foreclosure, it will wipe out the bank. So whoever buys the apartment is not subject to any existing lien.

How about condo boards?

Condo boards are a completely different kettle of fish because in a condominium the unit-owner owns the apartment. If there’s a mortgage on the property, the mortgage lender comes first, and the mortgage can wipe out the condominium lien. When the bank completes its foreclosure, if there’s surplus money, then the condo will be able to make a claim on it. It’s a rare situation, but there are situations where there is surplus money.

The condo board should act as quickly as possible. Again, the bylaws will state that if a party is in arrears for X number of days, the board can then commence its foreclosure action. And it’s important for the condo board to act as fast as possible because it wants to get in first and have the property sold. If the board is the successful purchaser, it will evict the unit-owner and then it can lease the property out, collect the rent, make themselves whole. Because there are so many foreclosures going on and because the bank attorneys don’t move quite as fast as the condo attorneys, the condo board could get in first and collect a good deal of its money.

So for a condo board trying to collect arrears, it sounds as if there’s a certain urgency?

There is an urgency because the board has to beat out the bank and the statute for a condominium foreclosure lien, as opposed to a bank foreclosure. In a bank foreclosure, the bank has to make a choice: It can either sue on the note to collect the money judgment, or it can foreclose. But the condominium can bring both actions simultaneously. So it may be able to get a money judgment much faster than proceeding with a foreclosure — and then send the judgment to the sheriff to sell the property, providing there’s sufficient equity in the property. 

If the board has a money judgment, it can garnish the unit-owner’s salary, and it can go after any assets that the owner has. At the same time, the board can be foreclosing because when you foreclose, you’re eliminating anyone who comes after you. That’s what foreclosure means.

This all comes back to fiduciary duty, doesn’t it?

Yes. A condo board has a fiduciary duty to the other unit-owners. If the board sits back and says, “Well, we understand he’s having problems,” it’s asking the other unit-owners to pay for the operating expenses of the condominium on behalf of the defaulting unit-owner. And that would be, in my opinion, a breach of fiduciary duty. The board should move as fast as possible in order to get a judgment and collect the money that’s owed.

WHO’S SUING WHOM

Unit Owner in Arrears Didn’t Answer Complaint in Time 

A unit owner didn’t pay approximately $7,200 in common charges for his unit. The condominium board sued for the arrears, and the unit-owner was served by substituted service, and then by personal service. He answered, but his answer was rejected as untimely. The board asked the court to enter a default judgment, and the owner asked the court to compel the board to accept his answer. A judgment had been entered for $19,000. The court ruled for the board.

Board of Managers of Harborview Condominium v. Goodman

Dec 30, 2020