Co-op Board Must Act Swiftly on Shareholder Arrears to Avoid Financial Strain

A shareholder failing to pay maintenance, fees or an assessment is a nightmare scenario for a co-op corporation. Collection efforts cost money, and the co-op’s governing documents, including the proprietary lease, will spell out the co-op’s rights. If the board is allowed to recover legal fees as well as maintenance when a shareholder defaults, it is in a much stronger position to recoup lost funds. The downside for any such clause is that shareholders have the same right to recoup legal fees if they win. 

DON’T DELAY  It’s important not to let more than a couple of months accrue before you take action on arrears. In a co-op, this can be done by bringing a non-payment proceeding in housing court against the shareholder. You will have more leverage if the proprietary lease has language allowing you to capture late fees and attorney's fees as well as the maintenance due. It’s therefore important to make sure the bylaws are updated to give the board as much authority as possible and reflect the fact that permissible fees, charges, penalties and assessments are included if a co-op takes a shareholder to housing court for unpaid maintenance. 

A CAUTIONARY TALE   We dealt with a co-op with landmark status where a shareholder had added an unauthorized balcony. The board served her with a notice of default and took her to court. The judge agreed the balcony addition was a technical violation, but concluded it was too trivial an issue to warrant eviction. Since neither party was the prevailing party, nobody got their attorney fees. The shareholder then calculated that 17% of maintenance for the building went to attorney's fees — and that she was basically paying to sue herself — so she withheld that percentage of her maintenance. When the board objected, she stopped paying maintenance entirely and in the end owed $200,000 to the co-op. The case was eventually settled for 80 cents on the dollar, but it illustrates how important it is for boards to know their rights and figure out remedies that benefit their building. In this case, the co-op was not able to recoup legal fees. 

LENDER INVOLVEMENT  When it comes to arrears, it’s important to act fast, be fair, and not allow the shareholder to drag out not paying what's owed. If the shareholder has a mortgage, there is usually a recognition agreement, which acknowledges the bank’s interest in the co-op. If so, you can notify the bank that the person's not paying their maintenance. The bank will then step in and may well pay the arrears and follow up with a foreclosure action. It’s therefore important to make sure you have recognition agreements kept on file and updated.