How to Effectively Manage Arrears in Your Building's Financial Strategy

Arrears, if let linger, can seriously impact a building’s operating budget and reserve funds. Dealing with arrears involves navigating legal protocols, initiating communication with delinquent residents and, in some cases, setting up payment plans. The course of action may be different depending on whether the building has adequate reserve funds. Even so, ensuring strong governance provisions within your bylaws help safeguard against financial strain.

WHEN TO SUE. One of the first, and perhaps most difficult, decisions a board must make is when to initiate legal action against a shareholder or unit-owner for non-payment. This decision is complex, as it means potentially suing a neighbor, which can strain relationships. However, financial obligations to the building take precedence to ensure ongoing operations and maintenance. The legal process in New York housing courts can be slow, typically taking 30 to 45 days just to file a case. Boards will want to avoid long delays in initiating non-payment actions, as any delay compounds the time it takes to recover funds. Starting early may prevent a situation where a board must wait three months or more before seeing any payment.

GIVING WARNING. Open communication can sometimes prevent arrears from escalating into legal battles. Rather than sending informal reminders about late payments, boards should follow legal protocols by issuing a formal notice, such as a five-day notice, which alerts the resident that the board is aware of the missed payment and is considering legal action. Informal discussions with the resident, particularly if the board suspects a temporary financial setback, can help the resident feel supported and potentially lead to a resolution without court involvement.

PAYMENT PLANS. For residents facing temporary financial difficulties, a payment plan may be an effective solution. Boards may arrange for payment plans to spread out the debt over several months, allowing the resident time to catch up. However, to ensure enforceability, these agreements are often best formalized in court. Without a court-ordered agreement, enforcing the payment plan can be challenging if the resident fails to meet its terms. One other option available to boards when a shareholder or unit-owner fails to pay common charges and there’s a tenant occupying the unit is to leverage a statute allowing boards to collect rent directly from the tenant. This approach is effective in collecting dues without involving lengthy legal proceedings against the absent owner.

SOLID FOUNDATIONS. Selecting knowledgeable board members and consulting experienced legal counsel are crucial steps in managing arrears effectively, preserving neighborly relations, and maintaining a stable financial foundation for the building.