How Boards Deal with Late Payments
The Tick to Curing Arrears
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Monthly charges, including common charges, emergency repairs, lawsuits, assessments, maintenance fees, dues and so forth, are a big part of owning a co-op or condo in New York City. When an owner is late, or misses monthly payments entirely, it affects the whole building and can adversely impact the entire community. There is less revenue that month, so savings may have to be raided. Property managers have to spend time better invested elsewhere dealing with the problem. Legal fees mount. And so on.
In the case of arrears, the difference between a co-op and a condo is vast, for reasons that are covered below. In short, co-ops are more insulated from potential financial harm than condos, whose ownership affiliations are tied to real property and personal mortgages.
What recourse do boards have when said payments are late or missed for months at a time? How does the process work? And how does it differ from co-op to condo? Let's take a look.
What is Arrears?
The word arrear is similar in sound and spelling to rear, as in one's hind quarters. And indeed, both words share the same Middle English root: arrere, meaning behind. To be in arrears—the word is always used colloquially in the plural—is a snazzy, legalese way of saying to be behind in one's payments.
While no one presumably wishes to be in arrears, the vicissitudes of life, livelihood and the economy ensure that some delinquency is inevitable. Statistically, about two percent of units are in arrears at any given time. Why does this happen?
"They lost their job," says Steve Osman, chief executive officer of Metropolitan Pacific Properties in Astoria. "Or there's been a separation. Those are the most common reasons."
Late payments can be the result of laziness, inattention to detail, apathy, or, sometimes, an inefficient mail carrier. In some cases—usually with shareholders unfamiliar with local law—maintenance is withheld in protest, to "punish" the board for some shortcoming, real or perceived, just as tenants will withhold rent if, say, the heat hasn't been fixed for the entire month of February. Protest withholding doesn't last long.
"You can't self-escrow," says Osman. "It doesn't hold up in court."
More often that not, delinquent payments are the result of an intentional calculus. The mortgage gets paid before the maintenance, the thinking goes, because the consequences for withholding the former are more dire. While this is, on the surface, true, not paying the maintenance can, over time, have the exact same end result—especially in a cooperative building, where the retribution for missing payments can be swift and painful.
"We're not overly concerned with arrears [in cooperative buildings], because the co-op has the ability to control the transfer of shares," explains Marc Taub, CPA, and a partner with ERE, an accounting firm in Manhattan. "Condos are a lot more complicated."
Boards, of course, are not banks, who have armies of clerks on hand to pounce on a missed payment with alacrity. While they do ultimately have the power to foreclose on a property if the situation worsens, that eventuality is far from immediate, and comes with attendant legal costs. For the communities involved, collecting arrears can be a real pain in the you-know-what.
Timeline: Co-op
If you purchase a co-op apartment, you are not buying the real estate per se, but rather shares in the cooperative itself—enough shares to finance the apartment in which you live. Because you are bound by the proprietary lease, you are, in effect, both owner and tenant.
Because of this ownership structure, cooperatives enjoy more protection than do condos from financial havoc caused by shareholders being in arrears. Just as it is harder for missed payments to damage the co-op's bottom line for too long—cooperatives tend to have more money on hand for rainy days, and have the means to cut their losses more quickly—it is easier for co-op boards to foreclose upon delinquent properties.
"Co-ops can take back shares if a shareholder is in arrears," says Taub.
The process works like this: after the deadline has passed—30 or 60 days later, usually—the delinquent party receives an if-you-don't-pay-we'll-call-the-attorney letter.
"Typically, the managing agent sends a letter of admonition," says Stephen O'Connell, a partner at Hartman & Craven, a law firm in Manhattan. "They try to work it out outside of legal counsel. If there is no response, or an inadequate response—typically, there's no response—they give it to counsel."
"After 60 days, we put them on legal," says Osman, "unless there's some huge reason we shouldn't."
If the delinquent party pays up, the problem is solved. If not, and the shareholder has a mortgage, the bank gets involved. In this case, O'Connell says, mortgages are a blessing.
"Boards are leery about financing units," he says, "but the reality is, it's good to have a lender on these apartments."
For most properties, the mortgage holder is first on the foreclosure line. Not so with co-ops.
"The interest of the co-op is superior to that of the lender," O'Connell explains. If the shares are foreclosed upon by the board, "the lender is left with a note."
The positive application of this is as follows: rather than have the board foreclose on the shares—and lose the collateral—a bank will generally pony up the price of the maintenance fees, to preserve its own self-interest, while at the same time instituting foreclosure procedures of its own.
"With some cajoling," O'Connell says, a bank "will send a check for the missed payments, plus the attorney fees."
The process can be swift. In a few months, the shares can be foreclosed upon. And with a foreclosure in hand, a new owner can easily evict a delinquent ex-shareholder.
From a shareholder perspective, it's important to respond to those letters from the attorney. Osman recalls the sad case of a co-op owner in Brooklyn who was a recluse.
"He had no mortgage, he didn't answer the notices, he didn't show up in court, and his apartment was foreclosed on," he says.
While this is a rare occurrence, it isn't that rare. "I've seen people lose apartments for very stupid reasons," Osman says. "They don't answer the letter, they don't realize that it goes to the Supreme Court, it doesn't go to Housing Court, and they lose their apartment."
Timeline: Condo
The process for a condo is more complicated, because of the more conventional organizational structure. Because lenders have the first lien on condos, banks won't cover lost maintenance payments. If the delinquent party is also not paying his or her mortgage, this is not a problem—the bank will handle the foreclosure—but if the owner is paying their mortgage but not maintenance, it can take longer to straighten things out.
The laws are more sympathetic to owners who are losing their homes if the homes in question are condos. "People can be protected by bankruptcy," says Taub.
The first part of the equation—the letter-sending and the lawyer-calling—is the same for co-ops and condos. If the payments remain withheld, however, the process is different.
"You file a notice of lien," says O'Connell. "It's a filing. It's not a big deal. Now the owner can't sell without satisfying that. It preserves the rights of the condo."
If need be, the condo can foreclose on that lien.
Some Important Tips to Remember
Most owners want to pay their maintenance fees on time, and only miss them when there is financial hardship. In a sense, it's cut and dried—there's not much action the board can take. But here are some tips on handling arrears:
1. Don't allow arrears to get out of hand.
While it is not pleasant to take legal action against a neighbor, especially one who is in dire financial straits, the board must act in a professional manner.
"Boards have to be diligent," says Taub. "Act sooner, rather than later. Don't let people get too far in arrears."
Osman concurs. "You can't let people go on and on," he says.
2. Be consistent.
"There should be a consistent policy," says Osman. "Sixty days and they go on legal. Don't make deals individually."
Strict application of the rules has positive effects.
"It gets around the building," Osman says. "Don't get on arrears."
3. Be wary of side deals.
While there are situations when a board might choose to allow a delinquent shareholder to pay later—if, say, an owner has been sick but is going back to work and back on full salary—it is best to avoid favoritism.
"Boards shouldn't pick and choose who goes to legal and who doesn't," Osman says. "If you want to make a payment plan, do it in court, so we don't have a discrimination lawsuit."
Greg Olear is a freelance writer, editor and stay-at-home dad living in Highland, New York.
Comments
Can you let me know what form to use to file a lien on the individual's property who refused to pay maintance fees? I live in Houston, Tx. Thanks, Kim
The owner of the shares of my rent stabilized apartment; has defaulted on his maintenance. What can I expect to happen next? I have been a tenant; in this building for 29 years. Will ownership return to the building management company? Will my lease renewal (current lease ends on July 31. still be offered as required by law? Please advice.
I LIVE IN FLORIDA IN A CONDO.MAINTAINANCE IS NOT BEING PAID ON SOME OF THE APARTMENTS DUE TO THE FACT THAT THE BANKS ARE DRAGGING THE FEET ON FORECLOSING. SINCE THE TENANTS IN THE CONDO ARE BEARING THE BURDEN, WHY CAN'T THE ASSOCIATION RENT THE APAPRTMENT SINCE WE ARE FOOTING THE EXPENSES? WHAT CAN THE CONSEQUENCES BE AND WOULDN'T THAT PUT PRESSURE ON THE BANK ONCE WE WENT TO COURT?
I own a condo in south jersey;an owner is in arrears of $1300 and now is in chapter 7.Can we still put a lien on it. If not what can we do about it. There are only 14 units and we do not have a property management company. we take care of things to save money.or do we have to hire a lawyer
In a NYC co op foreclosure with no mortgage the apt was sold at auction. I thought the court papers said the buyer had to pay the additional $ within 30 days. It will be almost five months since the auction and no $ is forthcoming. Do the foreclosed parties have any options?
What if a Board Member is late on their Assn dues?? Aren't they remiss on their fiduciary responsibilities?
I have been dealing with a co-op Board that appears to have denied a transfer of shares to me in a bad faith manner. The proprietary lease states that the Board will transfer shares to a spouse or a "financially responsible member" of a deceased shareholder's family. I inherited the shares to the apt. (that my mother and I had been living in for a long time prior to the purchase) by will bequest. The apt. went from rent-stabilized to co-op and the mortgage started in the same month that my mother died and I inherited the shares. I am also the Executor of the Estate of my mother, so I am both beneficial owner of the shares and the Executor. The shares are still in my mother's name, not in the name of the Estate (or in my name). I applied to have the shares transferred into my name when I had what I thought was an acceptable net worth of @$140,000 in 2005 (three years after I inherited the apt.). I provided every document and financial statement that the closing coordinator of the management co. told me to. A number of months later I received a letter from that closing coordinator that the request for the transfer had been denied, with no further explanation. The Board accepted maintenance and assessment payments from me directly (not from the Estate checking account) from January 2002 until October 2009, when I could no longer cover the maintenance. I recently mailed part of the overdue amount. . Because of financial losses in the market and because I have a disability that prevents me from working fulltime, I am unable to afford both the mortgage and maintenance. Because of this, I had my attorney request a transfer of the shares a few months ago so that I could access part of the equity of over $400,000 to cover some of my expenses and to do minor work in the apt. so that I can sell it as soon as possible at a price acceptable to the Board. Six weeks later, the Building Manager responded with a letter that my original application had been denied because it was "incomplete" and that I should reapply for the shares. He excepted business references from the application, as the closing coordinator also had. Both he and the Board are obviously aware that I am facing serious fiinancial problems and that I wouldn't meet financial requirements at this time and yet they are effectively blockiing my ability to obtain a refi with a home equity loan, which several mortgage brokers have assured me I could obtain with my good credit score, so I am in a catch 22 situation. Without doing around $10,000 of work on the apt it could be difficult to sell even though it is a highly desirable apt. in this building. Other less desirable apts. have sold here recently. Do you have any suggestions for how to handle this situation (I cannot afford to litigate the matter and legal aid groups can't take it on because of the very substantial equity in the apt.)? Keep in mind that an officer of the Board lives beneath me and has had a long-standing enmity toward my mother and myself over petty matters, in particular over the issue of watering my large terrace. Also, another officer is creating an odor nuisance on my floor with way too many cats in her studio apt.,which has disturbed both me and especially the residents surrounding her apt. which has resulted in many letters being sent by them to the Management and the Board, to no avail.
To Who It May Concern: I need help desperately, if anyone can assist me in this matter as far as my 'co-owner" of a co-op trying to evict me (with all rent paid to landlord), but due to me not paying their mortgage statement. I own 22 shares of a co-op, that is shared with another person who also owns 22 shares. I am not on the mortgage, because the bank told me that my credit score would increase the monthly payments, due to the fact that my credit was not good. I have paid my maintenance fees and have not been late and for the past three years I was contributing 50% of the mortgage fees, and paying it directly to the bank. the problem occurred, when I discovered that I could not collect on the tax return, due to the fact that my name was not on the mortgage. I want to know, can I be evicted from the second person who pays the entire mortgage, but only owns 22% of shares for the co-op? Also the person with the other 22% shares has never moved into the co-op since we purchased the property in 2006. We split the matineance cost 50/50 due to the fact that we both own 22% shares each, but in regards to the mortgage, that is only in their name, I stopped paying 50% due to not receivng any benefits with tax right offs or the other person honoring to give me a percentage of return on the co-op property. Neither one of us have anything in writing, stating that I have to pay their mortgage. However they recently wrote a letter of extortion telling me to move out by February 23, 2009 due to non payment of their mortgage. They are threatening to have me sign over my shares to them and reimburse them for payments since July 2009 to present date due to the portion of the mortgage. I need your help desperately!
Becoming a Board Member for a condominium association is strictly on a voluntary basis. In accordance with the by-law no member is to be compensated in any way. Case in hand a Board Member was hired as an Office Manager and is now a paid employee for the association. This person wants to remain as a Board Member and get paid for being the Office Manager. When the Board have their monthly or special meeings sometimes there are issues relative to employee. She refuses to excuse herself from these meeting. This will be setting a precident for any other board members that want to be hired for any future employement that might be available and still remain a board member. Is this not a confilict of interest?
I owe my condo association over $15,000 in monthly dues and "special assessments". (Unemployed now for 18 months...dues has doubled in 5 years....and its NOT enough.) We have been levied 5 "special" assessments as well during this time (No reserves for the golf and county club facilities that are falling apart and the condo reserves are 25% funded). We have lost over half the golf memberships since Dec 2004...so the ONLY source of OTHER funds is the homeowner when the kitty runs dry. Management will still need more money this fiscal year to cover the deficit budget that homeowners bought into last April. Presently, we show a deficit that will trend to 3 times what was forecast....and no increase in revenue. (No legal budget either) Attempts to negotiate a payment plan over the last 3 years have been fruitless...the "Management" turned down 3 reasonable payment plan offers. When they started suing homeowners and kept refusing my offers, I told them to tell me when it was over...if they can prove they are correct in court...then we can talk. Last fall the HOA tried to collect from two other homeowners by Summary Judgment...and the HOA lost the Summary Judgment motion because the Judge felt there WERE issues with authority and our documentation! While the HOA attempted to file liens against others who owe money...and had to remove the liens because of AUTHORITY issues with our poorly conceived governing documents...they DID NOT file a lien against me. The HOA has chosen to go after me in civil court for these fees?! I am waiting to hear back from my bank about the Obama "Making Home Affordable" program and will enter bankruptcy soon. So I am not sure what they are doing here...other than being stupid. My problem? The governing documents we have are useless (poorly written, altered without proper process, some documents not notarized or recorded, some missing signatures, the association is NOT incorporated and NOTHING "connects the f%$!ing dots"!)....if fact, the association may not have AUTHORITY to collect as a result! How does this happen? Foul play? A shell game? Greed? A disregard for the truth and what is proper and correct? BTW...I joined the Finance Committee, got on the Division Management committee and attend most of the Trustee meetings. I am often SHOUTED at by Trustees to SHUT UP!!! They do not want to answer my questions and hope that being rude and unkind will deter my constant line of valid inquiry into where the money is going and why they continue to make poor choices. What a nightmare......... At what point can they be proven to be doing things NOT in the best interest of homeowners?
