Who Is Best Suited to Collect Arrears?

Co-op and condo boards wield immense power in the running of their buildings, which carries a fiduciary duty to act in the best interests of all residents – and treat all of them equally. 

The collection of monthly maintenance or common charges – the financial life-blood of every co-op and condo – is one of the primary fiduciary duties of every board. It is also a minefield – and a barometer of a board’s culture and values. Some boards play strictly by the book when a resident falls behind on monthly charges. Others try inducements, such as denying access to amenities. Still others contact the shareholder’s lender or try to work out a payment plan. Regardless of the approach, a question will always arise: who should be tasked with collecting arrears? 

“Co-ops should use a law firm that specializes in the representation of co-ops,” says attorney Marc Schneider, managing partner at Schneider Buchel. “They are familiar with the co-op documents, and in my opinion they’re going to be more successful than anyone else recovering the maximum amount of money.” He offers another reason why boards should use a specialist: “Co-op boards often don’t realize it, but there are usually clauses in the proprietary lease to collect interest at the maximum legal rate allowed by the law.”

Most co-op governing documents have a series of protocols when a resident fails to make monthly payments. Typically, the managing agent sends a letter, followed by a default notice prepared by the co-op’s lawyer. “We make sure that the default notice already includes the legal fees and the disbursement that occurred in connection with it,” says Schneider. “Most co-ops do not add interest at this point, but they have the right to do so. If the two months plus legal fees are paid, nothing bad is going to happen. If you don’t pay it, we will bring a summary proceeding to evict you.” (The process is different in condos, where the mortgage lender has first lien on the property.)  

Peter von Simson, chief executive officer of New Bedford Management, takes a different tack when going after arrears. “We recommend to boards that they hire a law firm that specializes in landlord-tenant cases,” von Simson recently told Habitat. “What we’ve found is that we get a better product from both sides. The co-op’s general counsel doesn’t have a ton of time. They’re dealing with capital projects, contracts, maybe refinancing the underlying mortgage – big, time-sensitive issues. Arrears can get pushed to the bottom of the list so they drag out longer.” 

Using a landlord-tenant lawyer to collect arrears will also be less costly for a shareholder – a possible consideration for boards that don’t want to appear heartless when a resident has fallen on hard times, through loss of a job or other crisis. Schneider counters that the board’s legal obligations must override such neighborly considerations. “The co-op board has a fiduciary duty to protect all the other shareholders who are paying their maintenance,” he says. “Any dollar above zero is an expense for the co-op.” 

Furthermore, Schneider contends, some people who claim to have fallen on hard times are simply being manipulative. “Often they understand the game very well and know exactly how far they can go,” he says. “That’s why you want a specialist who is familiar with all the available remedies.” 

Though Schneider and von Simson might disagree on who is best suited for collecting arrears, they agree that boards need to follow procedures spelled out in the governing documents. “Everyone needs to know what those protocols are, and that they’re applied evenly,” von Simson says. “Where boards get into trouble is by treating people differently. That can lead to a lawsuit against the board. Good intentions can result in very messy situations.” 

One thing that is not in dispute: whichever method a board chooses for collecting arrears, the most important thing is to be consistent and treat all shareholders equally.