One of the most difficult issues for board members and residents of co-ops, condominiums, and HOAs is that of arrearages. The problem poses practical, procedural and ethical issues, and can ultimately lead to legal repercussions. There are plenty of reasons why residents may go into arrears on their monthly maintenance or common charges. The question is how to manage the problem effectively, efficiently, and with the least overt embarrassment possible.
Perhaps the most obvious and consistent responsibility one has as a member of a common interest community is not to serve on the board or a committee, or to act as a watchdog for your neighbors, but rather to pay your fair share of the community expenses (known as ‘maintenance’ in a co-op, and ‘common charges’ in a condominium or HOA). This obligation is contractual, and as a cooperator or member of an association, you enter into it when you buy your unit. It is of vital importance, as the operation of the community depends on your timely payments to make their payments – everything from buying cleaning supplies to making underlying mortgage or debt payments on other community financing. Regardless of the type of ownership, the structure is non-profit, and every penny collected is accounted for and used to maintain the community’s financial health.
The extent to which non-payment might affect the ability of the entire community to meet its obligations differs with the size of the association or corporation. Clearly, a $1,000 monthly obligation is more critical in a 20-unit property than in a 250- or 2,000-unit property, but nevertheless, arrearages have a negative effect and can pile up. Ultimately, they can have a cooling effect on resale prices if there are too many that have gone on for too long, as buyers often look to that information as an indication of what their potential investment’s financial health looks like.
Reasons for Delinquency
No one buys into co-op, condo, or HOA with the intent of defaulting. The purchase decision is saturated with tests on all sides to insure financial success. The buyer wants to feel comfortable knowing they can afford the monthly obligation. The board of the co-op or condo wants to feel secure knowing they have a dependable member; and the lender providing the financing for the acquisition of the unit wants to avoid foreclosure, a costly and painful experience for everyone involved. The assumption of monthly financial obligation in the form of maintenance or common area charges is made carefully by all parties and with the best of intentions.
Life doesn’t always turn out the way we plan, however. Cooperators or condominium owners may fall into arrears for any number of reasons. Generally, these reasons fall into two categories: ‘with-intent’ and ‘without-intent.’
Most cases fall into the category of ‘without-intent.’ For instance, people lose their jobs. While many corporations and associations require members to have a financial cushion in place when purchasing their unit, unemployment can continue for long periods of time, as was evident throughout the last years-long recession. A resident’s ‘cushion’ can be depleted long before new employment is found. A neighbor who has been a member in good standing and paid consistently for many years can now become a drag on the entire building.
Or how about when people get sick? Again, a sizable nest egg can be consumed in a shockingly short period of time when serious illness occurs. Medical insurance doesn’t always cover everything, and a resident may be faced with the choice of paying for life-saving treatment or paying their maintenance. And while these crises are going on, life continues to happen. College tuition still has to be paid, outside help may be necessary on a round-the-clock basis, and of course residents still have to eat.
Arrearages occurring ‘with intent’ are less common, but they do happen. Usually, they revolve around issues that may come up between the individual resident and the co-op or association board. Say, for instance, that a resident has an ongoing problem with a neighbor involving noise. The co-op or condo board may find it impossible to resolve the issue with the resident causing the problem. The affected resident may choose to pressure the board to resolve the problem by withholding monthly charges and placing them in escrow – a bank account held to the benefit of the corporation or association – until the dispute is resolved. However, while the money is being held for the benefit of the association or corporation, it isn’t being paid into the common accounts and therefore can’t be used to pay the bills – so it’s still an arrearage. It should be noted that under the laws governing cooperative corporations in New York State, this action is illegal. A cooperator cannot withhold payment in this manner, though many do it all too frequently.
When Arrearages Involve a Board Member
The legal, procedural and ethical considerations involved in arrearages becomes even more sensitive when it involves a member of a co-op or condo board. But is there any specific legal treatment or procedure for board member arrearages? The answer is a simple no, unless stipulated otherwise by the bylaws of the corporation or association.
Deborah B. Koplovitz, an attorney with the firm of Anderson Kill in New York City, says, “Legally, people have an obligation to pay their monthly charges under the co-op or condo’s governing documents. Procedurally, most co-ops have a policy in place that after a month [of nonpayment] the managing agent sends a warning letter. If there’s no response, then it goes to legal counsel or formal action.” She explains that there’s no special policy in most cases for board members. “All boards should treat everyone the same,” she says. “Ethically, people do get into trouble. It happens, and it makes sense for boards to consider that when people go into arrears. Maybe there is a way to work things out.”
Mark Hakim, senior counsel for law firm Chaves & Perlowitz, which has offices in New York and New Jersey, says, “You have to look at the bylaws to determine what if any right the corporation or association might have with respect to dealing with these issues. In older building absolutely not, there is no language dealing specifically with board member arrearages. It wasn’t considered at the time those offering plans were put together. Today, with new plans when we write them, we take these issues into account.”
What’s a Board to Do?
Stephen Boonshoft, an attorney with Robinson Brog Leinwand Greene Genovese & Gluck in New York City, says, “If a shareholder is a board member and is in arrears, and the bylaws don’t give the board any power to deal with the situation, the board can ask the member to recuse themselves. If the board member refuses, the board has no recourse. The board member can only be removed by the other shareholders.”
Hakim says he always advises his clients “that the board have a specific policy dealing with arrears primarily as it relates to board members, such that no other board member should be addressing it. It should always be addressed through management and counsel.”
In the absence of a specific policy (and according to the pros, there usually isn’t one), a board would have to move toward holding a special general meeting to resolve the problem of a board member owing the building or association. Board members are elected by the entire membership, and can only be removed by the vote of the membership, and some bylaws require a supermajority of the votes to remove a board member.
Short of removing the board member, another option open to boards is removing the board member from a specific voting role, such as president or treasurer, to prevent the board member in arrears from taking part in critical decision making; boards might also opt to set up subcommittees to vote on certain issues and not permit that member to serve on said committee.
Co-ops Versus Condos
When a board member doesn’t pay their monthly fees, “It does matter whether it’s a co-op or condominium,” says Boonshoft, “because changing the bylaws of a co-op is significantly easier than changing the bylaws of a condominium. If the existing bylaws don’t say anything on the subject, then in order to recuse a member of the board, one would have to change the bylaws. Many documents require that those changes be approved by a supermajority of shareholders.”
In a co-op, shares are accorded proportionately, based upon many factors. Not all similar apartments – two-bedrooms, for example – have the same number of shares, and therefore don’t necessarily require a majority of units, but rather a majority of shares. “Bylaws for a condo require a supermajority of unit owners,” Boonshoft says. That might be harder to get, as the number of unit owners involved is more absolute. “Condo bylaws might also go further in requiring additional steps,” he adds.
“The statutes and governing documents are different,” explains Koplovitz. “In particular the BCL—Business Corporation Law, the governing statutes for cooperatives—has certain rules about voting as a shareholder that are different from the Condominium Act.”
Another question is whether a board can prevent a current board member in arrears from running for re-election, or a resident in arrears from running for the board in the first place. There are ethical questions as to whether a board can ‘out’ a candidate for non-payment during the election process, or even whether the law permits that information, which is generally treated as confidential and fiduciary to the board, from being released. “Condos have more leeway to block someone from voting or running if the bylaws say so, but a co-op can’t do that, even if the bylaws say that. It would be a contradiction of the BCL,” says Koplovitz.
Perhaps the most important thing to keep in mind in dealing with these very thorny issues is that as Koplovitz says, “A cooperative is just that; a place where people cooperate with each other.” Arrearage situations can be difficult for everyone – board members and regular members alike. Imagine how uncomfortable that elevator ride can become. While the financial health of the community must be paramount, keep in mind: whoever it is didn’t go into arrears lightly.
A J Sidransky is a writer/reporter for The Cooperator, and the author of several published novels.