Coping With Arrears When Residents Fall Behind

 The foundation of any properly run condo association or co-op building rests on  residents paying their monthly maintenance fees on time and in full, with no  delays or delinquencies. However, in the wake of the recession, with many  shareholders and owners still on shaky financial ground, some co-ops and condos  are feeling the pinch of late and/or missing maintenance payments. Many owners  are also unable to cover the cost of special assessments to fund much-needed  capital repair and improvement projects.  

 Hard Times vs. Hardball

 Hilary Becker, CPM, owner/broker with Long Island-based Becker Real Estate  Services, has seen the effect that non-payments of arrears has had on his  buildings, and says that it’s a problem that has increased in recent years. “In general, most associations will provide residents with a 5-10 day grace  period. After that, a late notice is sent with the appropriate penalty,” Becker says. “When someone falls on hard times, and falls behind, we normally try to work out  a payment plan that the resident can live with, but it’s extremely management-intensive.”  

 Bruce A. Cholst, a partner with the Manhattan-based law firm of Rosen Livingston  & Cholst LLP, says that most people aren’t looking to get away with anything, but just don’t have the cash flow to pay. Still, he has dealt with many reasons why people  haven’t paid.  

 For instance, when money isn’t coming in, this sometimes leads to work not getting done, which has a  trickle-down effect of others not wanting to pay in response to things in the  building deteriorating.  

 “They may protest over apartment conditions or board policies and they think the  way to influence the board or get the board’s attention is by withholding common charges,” Cholst says. “That’s not only inappropriate, but illegal.”  

 No one is looking to throw people out of their homes, but boards and managers  can only let people slide by for just so long without taking action.  

 Time to Take Action

 According to Cholst, too many boards react too slowly to the problem and that  causes even more problems. “I’m always urging my boards to move more quickly than they do. I advise them to  have a policy not even to deal with it and have the managing agent call after  30 days, followed by a polite letter,” Cholst says. “If there’s no response, in 60 days for a co-op you would notify a bank and if we still  don’t get any result, 75-90 days, go legal. If you do that on a regular basis and  follow through, it forces you to react mechanically and quickly.”  

 The typical grace period written into most leases is 30 days. Under most, you  can’t initiate a rent demand—the first step—until the shareholder is late 30 days. The typical grace period before incurring  late charges is 15 days.  

 What happens in many cases is the boards lose sight of the fact that it’s a business as well as a community and allow non-business decisions, such as  trying to be good neighbors, to overshadow what’s best for the rest of the residents.  

 Once an arrears payment is missed, not everything happens immediately. In some  cases, this can be detrimental as it causes things to fall behind. Still,  everyone wants what’s best for the building and residents.  

 The time a board or association will wait before initiating collection  procedures will vary depending on what is written into the co-op or condo  bylaws. There are also restrictions as to what can be charged with respect to  state and federal laws.  

 “In general, the association can foreclose on a unit when the resident stops  paying common charges/maintenance; however, there are different approaches for  co-ops and condos,” Becker says. “Furthermore, it is extremely expensive and can run into the tens of thousands of  dollars. But if a resident is paying the mortgage and not the  maintenance/common charges, then the board has no option but to commence legal  proceedings. This is the board’s strongest way to bring the matter to a head once all other efforts have been  exhausted by the management company.”  

 Carl Borenstein, an agent who oversees co-ops and condos for Veritas Property  Management LLC in Manhattan, has heard residents use excuses such as  unemployment, strained personal finances, disputes, litigation, and/or  grievances as reasons for not paying their fees.  

 “Typically, after 90 days of nonpayment or other failed remedies, collection  procedures are initiated,” he says. “While there are individual ‘work-outs’ in some cases, grace periods for unemployment aren’t typical.”  

 With co-ops, in most cases, the non-paying shareholder has a mortgage (“end-loan”) with a bank, which enters into a “Recognition Agreement” with the cooperative. According to Borenstein, recognition agreements give the  bank an incentive to make current any unpaid maintenance.  

 “Otherwise, proprietary lease termination and foreclosure by the co-op is  pursued,” he says. “If collection fails, after termination of the proprietary lease, co-ops can  pursue eviction.”  

 For condos, initiating a lien on the unit, then either trying to go to small  claims court for judgment, or forcing a lender to start a foreclosure action,  is normally the course of action. If the unit is rented to a third party, the  association can try appointing a receiver to get rent paid directly to the  association. If not, forcing the bank to start a foreclosure may be their only  option.  

 The Role to Play

 While the management of co-ops and condos are their expertise, management  companies have had to become experts in the field of debt collections in recent  years. Many boards and residents don’t recognize that debt collection is a whole separate business and expertise, and  one that is secondary to most property management companies.  

 Other than budget review, the accountant plays a very small role in the process.  The attorney, on the other hand, is crucial in pursuing proper collection  and/or initiating foreclosure.  

 “The accountant normally does not have a primary role, and it’s the property manager who the board will be relying on for advice, and guidance  with respect to collection matters,” Becker says. “However, once the matter is turned over to the attorneys, then the property  manager will take a secondary role on the matter, but will track the situation  and report back to the board with respect to the status of the legal  proceedings.”  

 A Helping Hand

 If a resident is open in communicating temporary financial hardship, many times  devising installment plans can be productive for short-term (less than 90 days)  arrears.  

 “It’s a smart person who does react proactively and calls the board and lets them  know he or she is running into some financial difficulty and asks if they can  cut some slack and give a three-month moratorium or something like that,” Cholst says. “Very few people take the initiative to do that so the board has no way of  knowing someone is having financial problems.”  

 Borenstein warns that this isn’t the norm, but for it to work, a resident has to be upfront and communicating  from the beginning so things don’t get too far out of hand. Sometimes, a co-op or condo can make a move that is  both a business decision and shows that they are good neighbors.  

 “They can entertain a hardship application and let the unit have 90 days or they  can pay 50 percent and make it up down the road. It just needs to be documented  properly,” Cholst says. “It’s in the board’s interest business-wise because it will take a lot of time, money and effort to  take the next steps for collection, which you may not get back. Also, it’s in your best interest as a neighbor because you are buying good will. Plus,  you don’t know who the next person is.”  

 Although not common, our industry experts have seen members of the board or  other residents stepping up and prepaying future charges to make up for the  missed payments of others. This is done with the understanding that the money  will eventually come in via the foreclosure. However, it’s not always easy to get people to fork over more money than they need.  

 Cause and Effect

 When delinquencies accumulate, sometimes other homeowners are forced to pay  extra to cover for their neighbors. In small units, it can quickly cause the  association to have trouble meeting operating expenses, while even larger  associations will eventually feel the effects of the shortfall if multiple  units fall into arrears.  

 “Unpaid charges, and resulting legal fees, ultimately impact the budgets of  co-ops and condos, which determine the level required for maintenance or common  charges,” Borenstein says. “This could put a stop to any planned services (such as landscaping, painting and  repairs),” he says.  


 The Fair Debt Collection Practices Act applies at the beginning of a proceeding  and requires advanced noticed of 30 days. According to Becker, collecting a  past-due assessment requires sensitivity, and it’s important that the association does not violate the owner’s rights.  

 The FDCPA requires that when the association writes to an owner to collect late  assessments, it must state that the letter is an attempt to collect a debt, any  information the debtor gives will be used to collect the debt, the amount of  the debt that has accrued and the name of the association, and that the owner  has 30 days to dispute the debt’s validity in writing.  

 If a debt collector violates the act, the FDCPA says he or she may be liable for  damages to the debtor, such as emotional distress or slander.  

 Final Thoughts

 Most boards that attempt to collect delinquent common charges are faced with  essentially three choices: Enter into a payment plan with the defaulting owner,  sue for money damages or foreclose. Whichever method is chosen, it’s important to do it in a timely manner and make sure that the rest of the  building doesn’t feel the repercussions.   

 Keith Loria is a freelance writer and a frequent contributor to The Cooperator.


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  • Can a condo withhold services from a homeowner that has refused to pay maintenance and common charges.
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