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When Worlds Collide: Collection Of Common Charge Arreares By Condominium Associations When Banks Foreclosure
By Ken Jacobs, Esq. Smith, Buss & Jacobs

Sooner or later, your condominium association will be sued by a bank foreclosing against a unit owner who has defaulted under his or her mortgage. The bank will be trying to wipe out the Condominium's lien against the unit for any unpaid common charges. How can the Condo maximize its chances to collect unpaid common charges from a defaulting unit owner while foreclosure is pending?

Usually a unit owner who defaults in his or her mortgage also fails to pay common charges to the Condominium. The claims of both the Condo and the bank are secured by liens against the defaulting owner's unit. However, the bank's lien is superior to the Condo's lien.

When a unit owner defaults, the bank and the condominium can foreclose their liens against his or her unit, sell the unit, and use the proceeds to pay off their claims. Since the bank's lien is superior to the condo's, though, the bank gets paid first. Therefore, the Condo's lien will be valueless after a bank foreclosure unless the unit can be sold for more than the lender's mortgage (a rare event).

Unpaid common charges during a foreclosure get added to the Condominium's claims, but the bank doesn't care (because it gets paid first, regardless). So the bank moves at its customary slow pace through the foreclosure, sometimes for years. Meanwhile, the other unit owners have to make up the lost charges out of their own pockets.

The Condominium has to confront two problems: (1) How can the Condo collect its unpaid common charges from a defaulting unit owner after a bank starts a foreclosure? and (2) What can a Condo do to speed up a bank foreclosure to reduce its lost income? If a unit owner defaults, Condominiums can increase their chances to collect unpaid charges, even if a bank starts a foreclosure, by following these practical steps:

First: Commence a separate "money action" against the unit owner immediately. A money action is a lawsuit to collect a specific sum. It is much cheaper and faster than foreclosure, and can be started without losing any rights in a foreclosure.

Unlike a mortgage lien, a money judgment can be levied against bank accounts of the defaulting owner. And even if the judgment is uncollectible, it will affect the credit rating of the unit owner and must be repaid if the unit owner seeks to purchase another home in New York State.

Second: Determine whether the unit has any equity remaining above the amount of the mortgage. Unlike a bank, a Condominium can seek a money judgment and foreclose at the same time. If the unit has equity, a foreclosure proceeding may still be productive.

Third: If the unit is vacant or leased, move for the appointment of the managing agent as receiver as soon as foreclosure proceedings are commenced. The receiver is a court officer with the duty to preserve the property. The best way to preserve the property is to pay all unpaid common charges to the Condominium.

We have had great success in obtaining the appointment of the managing agent as the receiver, since the agent is familiar with the property and the sums at stake do not total enough for the judge to insist on his own choice. If the unit is vacant, the receiver can rent it. If the unit is already leased, the tenant must pay rent to the receiver. Either way, the receiver has the right to use the rentals to pay arrears in common charges while the foreclosure is pending.

Fourth: If the unit is owner-occupied, consider a settlement whereby the owner will move out, lease the unit, and pay a portion of the rental proceeds to the Condominium. The Law also allows you to start a foreclosure and require the unit owner to pay a "reasonable rental" (if your by-laws so provide), with appropriate remedies for a default.

Speeding up the Lender: Mortgage lenders generally have little incentive to pay attention to individual foreclosures. Nevertheless, we have managed to accelerate the foreclosure timetable by putting the bank on notice that the Condominium will hold it responsible for any losses the Condo incurs if the lender does not pursue the foreclosure diligently. In other words, if the lender's inaction causes the Condo to lose additional common charges, the Condo may hold the lender liable for "waste" of the Condo's assets.

At least fifteen states have adopted a form of "superlien" statue which gives the Condominium a priority lien for up to six months of common charges (plus legal fees), ahead of the bank. This allows the Condo to recover at lease a portion of its losses in a foreclosure.

Banks have fought bitterly in New York to keep the legislature from granting Condominiums any form of superlien. CAI has made the superlien one of its legislative priorities for the upcoming sessions. We will keep our members informed of the legislature's willingness to address this issue.

In conclusion: Condominiums remain weaker than banks in the struggle to collect arrears. Because of this imbalance, condominium associates should take immediate and aggressive action against defaulting unit owners in order to limit all unit owners' potential losses.

Community Life Wineter 1996

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