Ask the Attorney: What Can We Do When Condo-Owners Are in Arrears?

A. Collecting arrears on condo units is problematic mainly because the lenders holding first mortgages on condo units, as well as real estate taxing authorities, have priorities over condos. That means that a condo will suffer the time and expense of filing and foreclosing upon its lien on a unit in default, but can sell the unit at foreclosure sale only subject to, at the very least, what could be a very large first mortgage plus real estate tax arrears on the unit.

If the amounts of those priority claims exceed or even approach the market value of the unit, then there will be little value left to entice a purchaser to pay anything for the unit. And that doesn't include what is necessary to satisfy the arrears to the condo, as well as the legal and other fees and expenses that the condo incurred when it foreclosed.

The Co-op Difference

The condo board should 

file a lien against

the unit without delay.

As an aside, a co-op board does not have this problem because a cooperative's claim to the proceeds of a foreclosure sale of an apartment has priority over a shareholder's lender. This allows the co-op to sell the apartment at a foreclosure sale not subject to what is properly called the security interest — not the mortgage — of the lender. As another aside, the New Jersey legislature perceived at least some inequity for condos taking a back seat to lenders in 1996 by establishing a "super lien" of condos ahead of unit lenders for six months' worth of arrears. But, given the time and expense that it takes for a condo to bring a unit foreclosure lawsuit to the point of foreclosure sale, this provides little relief or even leverage to a condo.

The condo board should file a lien against the unit without delay, and indeed the board is typically obligated to do so under the condo's bylaws. This is not very expensive and, at the very least, will establish the condo's priority over creditors (other than the first mortgage lender and the taxing authority) who have not yet caused the recording of judgments or liens against the unit.

But if the Unit is Worth Bupkis...

If the value of the unit substantially exceeds the amount of any first mortgage — about which the condo can get a good sense by searching the public records for a copy of any mortgage recorded against the unit — then the condo should proceed with haste to foreclose. This will put maximum pressure on the unit-owner and best assure that, if the case is not resolved, the condo will be able to recoup the amounts due and its expenses from the foreclosure sale proceeds.

However, if the unit's value does not exceed the value of any first mortgage, then your task is far more complex because you have no ideal options. The condo board must reach out to determine firsthand precisely why the unit-owner is not paying and what, if anything, the unit-owner is willing to do, such as enter into a payment plan.

You also could try to induce the unit-owner's lender to prosecute foreclosure proceedings because a default to the condo is a default to the lender even if the unit-owner is making loan payments to the lender.

A condo board also could pursue the foreclosure itself even if the loan on the unit is close to or exceeds the apartment's value. Then there is at least hope that the condo could strip the unit-owner of ownership and occupancy of the unit, so that it can be sold to a unit-owner willing and able to pay.

Robert D. Tierman, a longtime co-op and condo attorney, is a partner at Litwin & Tierman.

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