Condo Boards Face Challenges in Foreclosure of Units with Unpaid Common Charges

When deciding whether to foreclose on a unit-owner in serious arrears, boards must understand …

THE LIEN PRIORITES IN PLAY

Commencing with a foreclosure action when a unit-owner is seriously in arrears is a drastic step and a measure of last resort for condo boards. Before proceeding, they need to determine whether a foreclosure makes good business sense, which boils down to who has liens on the apartment — and who has priority.

UNIT DISADVANTAGE. Compared with co-ops, which can foreclose on a shareholder’s apartment, auction it and get paid before the mortgage lender, condos are at a disadvantage. They are subordinate to both the mortgage and, in some cases, any real estate tax liens. That means if the proceeds from a sale are insufficient to cover the higher-priority liens, the condo can get wiped out in a foreclosure, receiving little to nothing for the unit’s unpaid common charges. The timing of lien filings is critical.

CASE IN POINT. We had an interesting foreclosure on behalf of a Manhattan condo where the board had let an arrears situation linger for four years. It turned out there were significant income tax liens filed against the owner by both New York state and the IRS. But once the board decided to proceed with the foreclosure, it moved swiftly to file its lien before the IRS and was therefore able to maintain priority. Had the IRS filed its lien just 60 days earlier, the condo would have been unable to recover its money.

We did the public auction, and a buyer paid $500,000 for the apartment. In these situations, buyers must not only pay the auction price but also take on the existing mortgage, which at this condo was $800,000. We’ve yet to close the sale, but I anticipate that the new owner will pay 100% of the common charges owed. Even if that isn’t the case, foreclosure was still the best option for the condo, since it’s getting a new, responsible unit-owner who will pay the common charges going forward. 

CAUTIONARY TALE. This case underscores the importance of acting swiftly when arrears arise and you’re proceeding with a foreclosure, as well as having counsel navigate the legal intricacies. After a careful study of the lien priorities and the rights of taxing authorities, a determination was made that the state and IRS were behind the condo, so pursuing a foreclosure was a financially sound decision. And I can’t stress enough that timely action can make the difference between recovering unpaid charges and losing out entirely.