CooperatorNews recently spoke with attorney Mark Axinn, a partner at New York-based law firm Phillips Nizer and chair of the firm's Cooperative and Condominium practice, to get his insight on the collections process, and how boards can successfully navigate it. 

COOPERATORNEWS: How does collecting arrears in a condo differ from doing so in a co-op? Are there any unique factors either board must consider? 

MARK NIZER: “Collecting unpaid common charges from delinquent unit owners in a condo association is more difficult than unpaid maintenance from co-op shareholders for two reasons: First, there is no landlord-tenant relationship between an association and a unit owner, which means that filing an eviction proceeding in Civil Court is not an option. 

“Secondly, who gets paid first (lawyers call this ‘lien priority’) is different. In a co-op, the corporation has the first claim on the shares and can get paid in full before a [shareholder’s] mortgage lender; in condos it is the opposite; the bank gets all the money it is owed first, and only then is the condominium association paid its arrears from surplus funds, if any.”

CN: Can you tell us more about how collecting arrears in co-op properties works in contrast?

NIZER: “In a co-op, the building serves predicate notices to the delinquent shareholder, and then can commence a summary proceeding in the Landlord & Tenant parts of the Civil Court. But in a condo the relationship is different, and there are no grounds for evicting an owner. Instead, the condo either files a lien for unpaid charges and commences a foreclosure action, or sues for breach of contract (ie, the bylaws) in the Civil Court, both of which unfortunately can be expensive and time-consuming.”

CN: Do the same rules apply to collecting arrearages for special assessments in condominium associations as apply to collecting arrearages of monthly common charges? If not, please explain how and why.

NIZER: “It’s always essential to check your governing documents to ascertain precisely what can be collected. Most bylaws provide that the condominium association may collect common charges, assessments, interest and legal fees in the same lawsuit.”

CN: What happens if a unit in arrears is being rented out by the unit owner to a tenant? Considering that the tenant’s rent is paid directly to the unit owner and not the association, does the association have any claim on the rental income from that tenant to cover the unit owner’s unpaid common charges? 

NIZER: “Yes! If a non-resident unit owner is delinquent in common charge payments for more than 60 days, New York Real Property Law permits a condo association to demand direct payment from that owner’s rental tenant. The association’s counsel or managing agent can send a letter instructing the tenant to pay their monthly rent directly to the association until the arrears are fully paid. The law also provides that as long as the tenant pays the rent directly to the association, the unit owner (who is the tenant’s landlord) may not commence a non-payment proceeding against them.”

CN: If the condominium association wants to establish a lien on the unit, where do they sit with relation to a mortgagee's position? Who has the superior lien?

NIZER: “Unfortunately, there is a statute which specifically provides that the first mortgagee has priority over the claim for unpaid common charges due the association. So if an apartment is under water and sells at foreclosure for less than the amount owed to the lender, the bank gets everything—and the condo association must write off its arrears; a new owner after foreclosure is not responsible for prior arrears. 

“In my opinion, this is the greatest problem owning a condominium: an apartment owner might end up paying for his neighbor’s delinquency. That is precisely the opposite of co-ops, where the cooperative corporation has a first lien on the shares for unpaid maintenance and the co-op gets paid in full before anything goes to the lender.”

CN: What if any unique rights does an association have to enforce collection?

NIZER: “Condos can file liens with the NYC Registrar’s Office for unpaid common charges, which then appear on title reports. It’s especially important to do that if the board believes the apartment will be sold or refinanced; a new buyer or lender will insist that the lien be paid first so the apartment can be transferred or pledged without that cloud on title. Of course, merely filing the lien will not get the association paid if no sale or financing is imminent, but then it additionally acts like a mortgage as a predicate for a foreclosure action.”

CN: What do you suggest is the best way for an association to collect unpaid charges?

NIZER: “The first action boards should take is to immediately contact the unit owner to ascertain why the monthly fee was not paid. Maybe autopay failed, or the person was away; in any event, immediate contact is important. Then if the matter is not resolved, the board should contact their legal counsel to address the arrears situation quickly, especially in condos where lenders have priority. Filing a common charge lien is always a good idea, especially if a sale or re-finance is imminent. If the unit is rented, and the unit owner is more than two months in arrears to the association, the condo can demand direct payment of rent. 

The board then should file a breach of contract lawsuit in Civil Court and seek a money judgment against the unit owner. Alternatively, as long as there is equity in the apartment, the association may commence a foreclosure action in the NY Supreme Court, but those lawsuits take longer and are more complicated than breach of contract (lawyers call those plenary) lawsuits in Civil Court.”