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Seminar
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Topic Introduction- Satellite Dishes |
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Habitat
Board Leadership Conference Seminar: Condo Collections
Moderator: Ronald A. Sher, Esq., Rothschild, Himmelfarb,
Sher, Pearl, & Giacomo, LLP
Panelists:
Donna Filippi, Board President, Evans Tower Condominium Douglas N. Weinstein
- Director, Akam Associates, Inc. Ronals Jay Gold, Esq., Wagner, Davis
& Gold, PC James E. Schwartz, Esq., Carb, Luria, Cook & Kufeld, LLP
Condo Collections- A Time For Tough Love
Unlike your co-op brethren who have paper trails and legal recourses that
condo boards can only dream about, collection delinquent common charges
in a condo is tough business. There are steps to take, however, and in
this seminar you'll learn them. From legal sanctions to proactive process
which can make your collection job easier, you'll hear which methods are
the most successful.
The Procedures For Colelction of Common Charges
Common charges and assessment collection is the life blood of the condominium
association. The board of managers has a fiduciary responsibility to ensure
that common charges and assessments are received in a timely manner. Failure
to do so may prevent it from fulfilling its other responsibilities: the
administration of the condominium and the preservation, maintenance and
enhancement of property values. If common charge and assessment collection
problems are widespread, the board may be forced to delay or curtail needed
maintenance, causing property values to decline.
The collection of delinquent common charges is a difficult issue faced
by many board of managers. The condominium can no longer depend on 100
percent common charge collection, thereby wreaking havoc with financial
concerns and the adoption of a formal budget.
The Declaration of Condominium in conjunction with the by-laws specifically
provide for the rights of the condominium and obligations of the unit
owner regarding the collection of common charges and assessments. Furthermore,
the enabling provisions of the aforesaid condominium documents generally
provide for the following:
1. Imposition of late fees and/or interest for delinquent payments;
2. Forfeiture of privileges - utilization of recreational facilities;
3. Filing of Notice of Lien;
4. Commencement of legal proceedings for a money judgment;
5. Commencement of foreclosure proceedings; and
6. Collection of rent from tenant - appointment of receiver.
Condominium Statutory Lien - Establishment
The Real Property Law, Condominium Act, Section 339-z, provides the condominium
with a statutory lien for unpaid common charges as follows:
Section 339-z, Lien for common charges; priority; exoneration of grantor
and grantee.
"The board of managers, on behalf of the unit owners, shall have a lien
on each unit for the unpaid common charges thereof, together with interest
thereon, prior to all other liens except only (i) liens for taxes on the
unit in favor of any assessing unit, school district, special district,
county or other taxing unit, and (ii) all sums unpaid on a first mortgage
of record or on a subordinate mortgage of record held by the New York
job development authority or held by the New York state urban development
corporation. Upon the sale or conveyance of a unit, such unpaid common
charges shall be paid out of the sale proceeds or by the grantee. Any
grantor or grantee of a unit shall be entitled to a statement from the
manager or board of managers, setting forth the amount of the unpaid common
charges accrued against the unit, and neither such grantor nor grantee
shall be liable for, nor shall the unit conveyed be subject to a lien
for, any unpaid common charges against such unit accrued prior to such
conveyance in excess of the amount therein set forth. Notwithstanding
the above, the declaration of an exclusive non-residential condominium
may provide that the lien for common charges will be superior to any mortgage
lien of record."
Condomunium Statutory Lien - Extinguishment
A fundamental conflict arose between unit owner lenders and the board
of managers of condominiums relative to the priority of the condominium
statutory lien and the first mortgagee lien in connection with foreclosure
proceedings. This situation was highlighted only when there was a deficiency
from the foreclosure sale resulting in an insufficient amount of funds
to satisfy both the lender and condominium. There was extensive litigation
between lenders and condominiums each arguing the superiority of its lien
and the right to the proceeds from the foreclosure sale.
The Court of Appeals of the State of New York on June 8, 1993, finally
resolved the conflict in favor of the lenders in the case of Bankers Trust
Company v. Board of Managers of park 900 Condominium, 81, N.Y. 2d 1033,
600 N.Y.S. 2d 191.
This decision concluded that a foreclosure sale to a lender did not constitute
a sale or transfer within the meaning of the Real Property Law, Section
339-z and that the priority of liens established by the statute subordinated
the common charge lien to a recorded first mortgage. Further, that this
interpretation of the statute was supported by the legislative history
and the by-laws of the condominium recognized the priority of the first
mortgage over any claim for common charges. Accordingly, the highest court
in New York State decided that although the plain language and meaning
of the statute, Section 339-z, established a lien for common charges in
favor of the condominium, it also specifically granted priority to liens
for "all sums unpaid on a first mortgage of record."
Collection of Rent
In order for the condominium to survive the foreclosure litigation and
attempt to offset the loss of common charge revenue, the condominium generally
has the right to collect rent from a tenant in the unit, pursuant to the
Declaration of Condominium and by-laws. Accordingly, if the unit is either
vacant or leased, the condominium should consider submitting a motion
to court requesting the appointment of a receiver in conjunction with
the foreclosure proceedings commenced either by the condominium or lender.
The duty of the receiver is to preserve the integrity of the property,
pursuant to RPAPL Section 1325(2). Therefore, the receiver can enter into
a lease agreement with a tenant and/or collect rent from the existing
tenant and remit the rental payments, as directed by the court.
Another conflict arose between the lenders and the condominiums relative
to the entitlement of the rental payments collected by the receiver during
the foreclosure proceedings. This conflict has been initially decided
on the lower court level, in Supreme Court decisions of First New York
Bank vs. 155 E. 34 Realty Co., 158 Misc. 2nd 658, 601N.Y.S.2d 990 and
Board of Managers of 300 West 23rd Street Condominium v. K.B. Chelsea
Realty Associates, NYLJ, August 5, 1992.
Pursuant to the decisions, it was noted that the receiver in a mortgage
foreclosure action is an officer of the court, not an agent of the lender
and has the duty to preserve and operate the property within the confines
of the order of appointment. The lender should not be entitled to the
benefit of the monies collected by the receiver unless all expense in
connection with the operation of the business (condominium unit) are paid
in full and by profitability operating the existing business to provide
funds that can be applied to reduction of the amounts owed under the mortgage.
Therefore, the court indicated that a receiver of a condominium unit upon
request should pay common charges assessed against the unit during the
period of receivership; however, a distinction was drawn with respect
to the payment of special assessments which are generally for payment
of capital improvements which will benefit the premises for a period well
beyond the expected term of the receivership. Certain issues have also
arisen regarding the utilization of the rental payments to offset payment
of arrears that existed prior to the appointment of the receiver; or the
entitlement to the rental payments that exceeds the amount of the common
charges.
Additionally, the Department of Law, State of New York Attorney General's
Office, promulgated certain rules and regulations as well as obtained
passage of an amendment to the New York State General Business Law, Section
352-e (2-d) on July 23, 1991, with respect to the collection of rent and
applies to all cooperative corporations and condominium conversion plans.
The law is intended to protect cooperative corporations and condominiums,
when sponsors or other outside investors fail to pay monthly carrying
charges. The law enables cooperative corporations or condominiums to collect
the rents payable by rental tenants living in units owned by defaulting
investors or the sponsor. In the event payment of maintenance, common
charges, assessments or late fees by a sponsor or other investor is more
than thirty (30) days late, rental payments from the non-purchasing tenant
shall become directly payable to the cooperative corporation or condominium.
Bankruptcy
Furthermore, the filing of a bankruptcy petition by a unit owner will
stop all collection proceedings and foreclosure litigation by the condominium
or the lender, by reason of the protection afforded pursuant to the automatic
stay provisions of the Bankruptcy Code.
A Chapter 7 Bankruptcy filing will permit the unit owner to be relieved
of all prior obligations, including common charge delinquencies. The Bankruptcy
Code was amended to provide for the continued obligation of the payment
of common charges by a unit owner remaining in possession or renting the
premises, subsequent to the filing of a bankruptcy petition. This amendment
is designed to prevent abuses and provides for the non-dischargeability
of post petition rent payments to the condominium.
Condominium Super Lien Law
Super Lien statute is intended to provide condominiums with a limited
priority lien for up to six months of common charges with respect to foreclosure
sales. This permits the condominium to recover at least a portion of the
delinquent common charges, which lien would otherwise be extinguished
and discharged pursuant to the lender foreclosure.
The status of the proposed Super Lien law is tenuous, at best, since lenders
have lobbied extensively against its adoption and passage by the New York
State legislature. In fact, the legislature several years ago permitted
the proposed legislation to die in committee and, thereafter, in a subsequent
year, the bill was soundly defeated on the floor. Many organizations and
Bar Associations, including the Council of New York Cooperatives, the
Real Estate Bureau Task Force, the Community Association Institute, and
the Cooperative Condominium Advisory Council of Westchester County have
made passage of the Super Lien statute one of its legislative priorities.
Conclusion
In conclusion and based upon the foregoing, condominiums must immediately
implement effective collection procedures and take decisive action against
defaulting unit owners in order to limit the potential loss of revenue
to the condominium. Moreover, the condominium must address the issue of
forcing the lender to accelerate the foreclosure proceedings, as well
as obtain the appointment of a receiver, since the lender will only be
responsible for the payment of common charges at the completion of the
foreclosure.
Submitted By: Ronald A. Sher, Esq.
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