Collecting Arrears – When Owners Fail to Pay

Mortgage Payment on Calendar

Most cooperative and condominium apartment owners pay their monthly fees and assessments in full and on time.   However, some of our clients have recently reported an uptick in arrearages.  There are both similarities and differences in addressing arrearages in cooperatives and condominiums.

First, the similarities.

Allowing habitual or significant arrearages to accrue poses at least three potential problems for all buildings.  Arrearages impose cash-flow difficulties that, if not addressed promptly, place a financial burden on both regularly paying owners, who must shoulder the deficit, and on building managers who must juggle it.  They can create a downward spiral, acrimony and bad habits within the building as owners become aware that their neighbors are not making timely payments.  And, in extreme cases, arrearages may give a building a bad profile or reputation with respect to financing or apartment sales.

Therefore, it is important that boards of both condominiums and cooperatives work with their management and counsel to put in place a regular protocol for monitoring and collecting arrearages.   As a general matter, our recommendation is enforcement of the late charge provisions of leases or bylaws, coupled with an initial prompt collection letter from management for any amounts not paid within 30 days of the due date.  This letter should be followed by a firm, but polite letter from counsel if payment is not made.  Each letter should set a response deadline.   If the deadline in counsel’s letter is not met, legal proceedings should be initiated.   These time periods and procedures can, of course, be varied somewhat from building to building based on the board’s view of how collection matters should be handled, and, in special hardship circumstances, a board may decide to forebear in collection for some period of time.  The most important thing is that collection procedures should be systematic.

Now, the differences.

Cooperatives

In many respects, the remedies for nonpayment in a cooperative are faster, less expensive and more effective than those available in a condominium.   Because, in a cooperative, the relationship is one of landlord and tenant, arrearages may be pursued in statutory summary nonpayment proceedings brought in landlord-tenant court.  In a summary proceeding, the cooperative will be entitled to a money judgment, secured by a warrant of eviction that can be executed if the amount of the judgment is not paid.  Legal fees will also be assessed by the court against the tenant-shareholder, though frequently not in the full amount incurred by the cooperative.  If necessary, there can ultimately be a non-judicial foreclosure sale of the shares using efficient statutory procedures.  Most importantly, the cooperative’s position at the end of process is fully protected because by statute its lien is first, and superior to the liens of lenders or other creditors.  In a foreclosure (whether initiated by the cooperative to collect maintenance arrears or the holder of a loan on the apartment), the co-op will receive from the proceeds generated by the sale the amounts it is owed, before payment of any portion of amounts owed to others.  Because of the priority of the cooperative in a foreclosure, lenders will sometimes step in once a cooperative has commenced a collection proceeding, pay the sums past due and then deal with the shareholder.

Condominiums

In a condominium, there is no landlord-tenant relationship, so a summary proceeding is not available.  Rather, the condominium’s remedy is to file a common charge lien and then bring a relatively cumbersome and lengthy lawsuit to collect on the lien or to foreclose. More importantly, to the extreme detriment of condominiums, and unlike the arrangement in a cooperative, a condominium’s lien is by statute subordinate to the lien of a first mortgage lender.  Thus, there is no incentive for mortgage lenders to pay common charges while a condominium’s foreclosure proceeding is pending and, if the lender commences its own foreclosure in response to the condominium’s action (as if often the case), there will be no incentive for the lender to finish the proceeding promptly.  Condominium unit foreclosures brought by lenders can linger for years.  When the sale or other disposition of the foreclosure finally occurs, the sales price is usually less than the principal, interest, penalty interest, and fees due the lender, and the condominium collects nothing.  While there are strategies that can be used during the pendency of a foreclosure under certain circumstances to slightly improve the position of the condominium, they are not always cost-effective.  It is therefore particularly important for condominium boards to be vigorous and systematic in collection efforts at an early stage.

There is no good reason to delay in the collection of arrears.  Undoubtedly, the longer a board waits, the worse it will become.  The above highlights some of the procedures, but we encourage boards to contact us as there are often a variety of legal approaches which can be taken in each case.