If a shareholder stops paying maintenance, they risk getting involved in a lawsuit or having the apartment sold by their board or lender.

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Question:

A shareholder in our 16-unit co-op hasn’t paid maintenance in over a year. What are our options?

Answer:

“If a co-op isn’t receiving the maintenance it is due, it puts pressure on the building’s financial health and generates bad politics within the community,” says Steven Wagner, a real estate attorney at the Manhattan law firm Wagner, Berkow & Brandt who represents co-op and condo boards and owners.

Essentially, the shareholder is taking an interest-free loan from the co-op without permission, with the other shareholders covering the shortfall.  

“Hopefully your building has reserve funds, but those funds should not be used to pay the dues of defaulting shareholders,” Wagner says. Even if the missing maintenance amount is low, after a year or so it can quickly build up to several thousand dollars of missing income for the building. 

“When a shareholder stops paying their maintenance, they risk getting involved in a lawsuit or having the apartment sold by their board or lender,” he says. 

Establish a payment schedule

The first step for the board is to reach out to the shareholder and notify them they are in arrears. 

“You may want to encourage the payment by offering to waive late fees if they agree to a payment schedule and stick to it,” Wagner says. This can be an incentive for the shareholder and a gesture of goodwill by the board. 

You should make sure that the payment schedule is “without prejudice” to the co-op’s rights, Wagner says. This means the co-op will not compromise its rights to pursue the shareholder if they default on the payment schedule.  

Notify the shareholder’s lender

If your board is receiving promises of payment that aren’t being honored, the next step is to send a formal rent demand and copy the shareholder’s lender, assuming the shareholder borrowed money for their purchase or financed the apartment after closing.

Banks require that the co-op and the apartment owner sign a document called a recognition agreement, by which the co-op recognizes the lender’s security interest in the co-op and undertakes to notify the lender if the borrower is in default. 

Often this action results in payment by the bank. “A bank typically wants to cure the default because they don’t want the co-op to terminate the proprietary lease and cancel the shares,” Wagner says. The shares and the proprietary lease are their security for the repayment of the loan and the bank will add this sum to the original loan and possibly foreclose. 

Take the problem to housing court

Sometimes the banks don’t pay. If this is the case, you may want to start a lawsuit in housing court called a non-payment proceeding, Wagner says. A notice will be issued to the shareholder telling them how many days they have in order to come to court to answer the notice of petition. If the court decides the shareholder is in default and they do not make a payment, the court may issue a warrant for the shareholder’s eviction.

However, Wagner points out there are currently a number of problems with non-payment proceedings.  

“The first and most important issue is that because of the pandemic, the courts are completely backed up and there is currently a prohibition against actually evicting someone,” Wagner says.  

It is difficult to say how long the delays will be and for how long they will continue.  

“These cases often get settled by a stipulation that typically provides for a judgment of possession and a warrant of eviction—which will not be enforced if the shareholder adheres to a payment schedule,” Wagner says.

Taking other legal action

Depending on the amount of the arrears, you will have various other legal routes open to you. For smaller amounts, up to $10,000, you can take your case to the small claims court.

If the unpaid maintenance exceeds the small claims court limits up to a sum of $50,000, you can bring an action against the shareholder in the general part of civil court.

“In these cases you will not get a warrant of eviction, but you will get a money judgment which is good for 20 years and will have to be paid if the shareholder refinances or sells the apartment,” Wagner says. Judgments accrue interest at a rate of 9 percent per year. 

For amounts exceeding $50,000, a case can be brought in the New York State Supreme Court. 

With any of these proceedings you should check with your attorney to make sure you have the right documentation to be successful in these types of claims.

A notice of sale

Another way of getting the attention of the shareholder is to notify the shareholder of the sale of the apartment through what’s called a non-judicial foreclosure, Wagner says. In many cases, this type of action results in payment from the defaulting shareholder. 

“A New York City co-op is a sizable investment and shareholders will often find the funds to avoid their property being seized from them in this way,” Wagner says.   

There are, however, some legal issues with this method. “You’d need to be careful and make sure all the proper notices are sent and procedures are followed,” he says. 

“If the shareholder does not show up and the apartment is sold, the co-op takes what is owed to it, including the expenses of the sale, and pays the balance to the defaulting shareholder,” Wagner says. 

New York City real estate attorney Steven Wagner is a founding partner of Wagner, Berkow, & Brandt, with more than 30 years of experience representing co-ops, condos, as well as individual owners and shareholders. To submit a question for this column, click here. To arrange a free 15-minute telephone consultation, send Steve an email or call 646-780-7272.

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