One of the owners in our NYC condo building has stopped paying common charges. What can our board do to get paid?
“If a condo owner stops paying their common charges, it can leave the building with a funding gap, which can quickly build to a sizable loss of income,” says Bonnie Reid Berkow, founding partner of Wagner, Berkow & Brandt who has more than 30 years of litigation experience representing condominium boards.
If this is the situation in your building, it’s very important for a condo board to take action quickly.
“You don't want a year or more go by with unpaid common charges accruing. The bigger the losses, the more difficult it will be for the condo and unit owner to reach a settlement agreement where the arrears can be paid back within a reasonable timeframe,” Berkow says.
It is also the responsibility of the board and the managing agent to collect from unit owners who are behind on payment in order to maintain the financial stability of the condo. In order for proper action to be taken, the managing agent should alert the board if an owner is in arrears for more than two months.
An often overlooked and relatively inexpensive option when the arrears are under $10,000 is to bring an action in small claims court. This could result in a money judgment enforced through wage garnishment or restraining bank accounts. This is a remedy available in addition to filing an action to foreclose against the unit to recover the amounts due.
Your attorney will play an important role in guiding the board through this complicated process. Some of the moving parts will involve putting together all the documents to commence an action, making sure the correct procedures are followed, negotiating a settlement with the condo owner or, when necessary, following through with a foreclosure sale, as well as taking other actions to assist in collection of the arrears.
First check the condo bylaws
Your goal in the process is to find ways to encourage the condo owner to pay what’s due.
The condo bylaws will describe how you go about getting payment from a unit owner who is in default.
“The bylaws will talk about the notice that is required—the wording—and how it should be given, and it will provide for other remedies to the condo in the enforcement process,” Berkow says.
Most bylaws provide for late fees or interest; sometimes the interest rate indicated in the bylaws can be as much as 2 percent per month on the amount owed. “Part of the process will be gathering accurate records showing the amount owed for common charges, assessments, late fees or interest charges and clearly identifying how much is owed,” Berkow says.
These records should be provided by the managing agent for the condo. Often the managing agent’s accounting program will compound the interest, which may result in interest charges that are ultimately unenforceable because they exceed the permitted legal rate.
If the interest is sizable, this can complicate the process because a court-appointed referee can take issue with some of the numbers and determine that the interest charges are unenforceable, and you can end up with an unfavorable decision that leaves the condo unable to collect any interest on the arrears.
“You will want your attorney to speak to the managing agent and make sure the interest and late fees are properly computed, do not violate the law and are ultimately enforceable,” Berkow says.
Filing a lien against the condo
Filing a lien against the condo unit is the first step in collecting the money owed. A lien is a document recorded with the City Register that identifies the apartment, the unit owner, and states how much is owed. The debt may be broken down into how much is owed for common charges, assessments, late fees or interest, and legal fees, and may also include other charges such as storage or parking fees.
The lien also prevents the unit from being sold without satisfying the debt owed to the condo.
Often notice that a lien has been filed prompts the unit owner into action, Berkow says. “The unit owner is required to pay all amounts owed, including any legal fees, in order to have the lien released,” she says.
When the owner’s mortgage bank gets involved
If a condo owner is not paying their common charges it is more than likely they are also failing to pay their mortgage, Berkow says.
“The law in New York State provides that the bank has priority over the condo in recovery of its money. It is therefore generally prudent to wait to allow the bank to start its own foreclosure proceeding,” she says.
It does not benefit the condo building to commence foreclosure if the bank gets to recover all the money before the condo gets paid. If the condo has filed its lien, it can appear in the bank foreclosure and demand payment of any surplus that may be available after the bank is paid.
Sometimes bank foreclosures can proceed “as slow as molasses,” Berkow says, and that means years can go by and while interest is accruing on the mortgage and the condo isn’t being paid.
“To encourage the bank to go faster, your attorney can work to limit the amount of interest the bank can collect—taking it back to a date when they should have acted more quickly,” Berkow says. She was successful in doing exactly this recently in the foreclosure of a Manhattan condo.
“This goes some way towards protecting the equity in the apartment and helping protect any potential surplus for the building,” she says.
Putting rent towards common charges
One remedy for a board if common charges are not being paid is to take the rent from any tenants living in the apartment. “If the condo owner is not living in the apartment and there are tenants in place, the board can tell the tenants the rent must be paid to the condo rather than the landlord,” Berkow says.
The law provides that if the rent is paid to the condo, the tenant is protected from claims for rent payment by the landlord or unit owner. Usually the rent is greater than the amount of monthly common charges so that payment of the rent may quickly defray the arrears.
Berkow notes that often this rent demand will encourage delinquent unit owners to satisfy their arrears because they do not want to lose what may be significant rental income.
A foreclosure sale
If the condo has to commence foreclosure proceedings, there are several avenues to follow to recover the money owed and obtain other benefits. As well as the judgment to foreclose the lien and sell the unit, the condo can also include a claim for a money judgment. The condo may also want to include a claim for ejectment so that it is able to remove the apartment owner or tenants after the foreclosure sale. If the unit is under water and the unit owner does not live there and is not responding, the complaint can also ask the court to appoint a receiver to rent the unit and collect rent from the tenants while the action is pending.
Berkow recalls one case where the unit owner was absent and there were a number of people living in the unit who were being a nuisance to their neighbors, including noisy, all-night parties. Because the complaint included a claim for ejectment, Berkow was able to evict the tenants while the action was pending, providing relief to the neighbors.
The court order granting judgment of foreclosure and sale will also set forth the procedures to be followed, including where the notice of sale is to be published and where the sale is to be held. It is important to follow these procedures to the letter, or the foreclosure sale could be set aside.
There are usually a number of investors at every foreclosure sale who will bid to buy the unit. "If there is money owed on the mortgage, any bidder must bid enough to satisfy the condo lien and also understand that they have to pay what is owed to the bank," Berkow says.
If the apartment is worth $1 million and the condo lien is $100,000 and the bank is owed $300,000, an investor can bid $100,000 to pay off the lien, pay off the bank and sell the apartment at a profit. Sometimes the value of the unit when compared to the total amount of condo and bank arrears is great enough that bidders will bid up to an amount greater than the total amount owed, which would result in a surplus that could be paid over to the unit owner.
However, if the total amount owed to the condo and the bank is greater than the market value of the unit, it may not sell to a third party and the bid would default to the condo. The condo may not want to be in a position of owning the unit that is still subject to the bank’s mortgage unless it can negotiate with the bank in the advance of the sale or is confident that it can quickly flip the unit to a third party for an amount sufficient to pay off the bank.
In that event, the condo may not recover all or part of the common charge arrears but will at least have recovered the unit for sale to a third party who can then start paying common charges.
"The condo will also have a money judgment against the defaulting unit owner that may be collected through garnishment of wages or restraining bank accounts, where possible," Berkow says.
These complications underline the importance of keeping track of arrears and taking prompt action to file a lien and to pursue enforcement.
If the condo owner files for bankruptcy
Often as a last resort, the condo owner will file for bankruptcy on the eve of the foreclosure sale. This filing cancels the sale and the condo cannot proceed with the foreclosure while the bankruptcy is pending.
It is important that the condo promptly file a proof of claim in the bankruptcy, review the proposed plan submitted by the debtor, and file objections to the plan.
Very often the plan is flawed and is thrown out by the court. The condo board then needs to move to dismiss the bankruptcy.
"With prompt action by the board, the tactic of filing for bankruptcy may only result in a delay of a few months, after which the condo can again proceed with the foreclosure sale," Berkow says.
New York City real estate attorney Bonnie Reid Berkow is a founding partner of Wagner, Berkow & Brandt with more than 30 years of experience litigating in state and federal courts in New York state, including cases involving breach of contract, fraud and breach of fiduciary duty, in addition to real estate disputes and commercial actions. To submit a question for this column, click here. To ask about a legal consultation, send an email or call (646) 780-7272.