While news of defaults, liens, and other financial train-wrecks have dominated  the news and caused many building boards plenty of sleepless nights, co-ops  have been lucky. While a spike in defaults on maintenance payments over the  last three years has forced many condominium boards to scramble to make up for  lost income, legal and management professionals say that co-ops have survived  relatively unscathed. But why is that?  

 Luck, or Planning?

 Actually, luck has little to do with it, according to attorney Dennis DePaola,  executive vice president of Manhattan-based Orsid Realty Corporation, which  manages 120 buildings, around 80 of which are co-ops. “There are a lot of mortgage foreclosures, but not by co-ops, because co-op  boards have been more diligent through the years in restricting their amount of  financing. Co-ops are not typically over-leveraged.”  

 Another advantage co-ops have over condos is their priority over bank loans in  order of payout in a foreclosure, says attorney Stephen M. Lasser of the  Condominium & Co-op Group in the New York office of Stark & Stark, where he is a partner. “In a condo, the mortgage gets paid first," says Lasser. "If the owner doesn’t pay their common charges, it doesn’t really affect the lender. So the lender has no incentive to pay the common  charges.”  

 A co-op, on the other hand “has a statutory lien,” explains Lasser, “and that has priority over the bank. If somebody doesn’t pay their mortgage in a co-op, in most cases the bank will step in and pay the  arrears in order to prevent their lien from being wiped out if the co-op sells  the apartment.”  

 Additionally, says to Steve Osman, CEO of Metropolitan Pacific Properties, a  management company in Manhattan, “Condominiums are very hard to foreclose on. It could take years. Co-ops are  rather easy. You’re just calling in common stock.”  

 But while the recession has not dramatically increased the number of defaults in  co-ops, it has taken a toll on their financial health in other ways. In  buildings with flip taxes, the virtual standstill in resale activity has cut  off that particular income stream. And those which have relied on income from  commercial space—both retail and office—have been hurt by vacancies and rent reductions as well. Perhaps most damaging  of all is rising taxes. With New York City falling deeper in debt, and with so  many of its revenue sources melting away, property taxes are soaring.  

 Indeed, with these pressures taken into consideration, “Collection of arrears is more important than ever,” says Osman.  

 Laying a Solid Foundation

 As one might expect in this economy, “The loss of jobs is the number one reason [residents] are falling into arrears  right now,” observes Osman. The other reasons are the same as they ever were, including  illness, death, bankruptcy and marital disputes.  

 However, Osman says the most pernicious cause for nonpayment is “holding up payments for lack of services,” which has a demoralizing and anarchic effect on the operation of the  corporation. “That’s very dangerous,” he warns his boards. “That cannot happen!”  

 So how can boards and managers see to it that their residents stay up-to-date in  paying their fees, or failing that, that the building doesn't get stiffed in  the end if the bank forecloses on the resident's apartment?  

 “A lot is going to depend on what your proprietary lease says,” according to real estate attorney Martin Tenenbaum, a partner in Tenenbaum & Berger, a Brooklyn law firm.  

 “When you are drafting proprietary leases, you should always have some kind of  mechanism to deal with constant arrears. Most of the proprietary leases I’ve seen don’t have a paragraph for consistent nonpayment.”  

 According to DePaola, Orsid Realty recommends that its co-op boards revisit  their corporate documents during times of economic stress such as these, and  update their proprietary lease to make their nonpayment policy clear. Late fees  range from $35 to as high as $100, he says, and are issued after the 8th or the  10th of the month. Generally, $50 is a fairly standard amount for late payment  fees. DePaola recommends that co-ops levy interest on any outstanding balance  to reflect the administrative costs of collection.  

 “Some boards give management the discretion to waive late fees if there is a  meritorious defense,” adds DePaola, or if the shareholder “has missed just one month and has a good payment history.”  

 On a related note, “Board members should not get too involved with the actual process of the  collections,” warns Osman, but rather leave it to management and attorneys every step of the  way. “Otherwise it gets pretty miserable to come to your elevator after work, and deal  with these people. They should allow management to be the bad guy, the enforcer  of the house rules.”  

 Which is not to say that boards should abdicate their financial duties or turn a  blind eye to residents in arrears. “Boards have to be very fastidious,” adds Osman. “You can’t slack off.”  

 A shareholder on a tight budget might ask him or herself, “‘if I don’t pay my maintenance, or if I don’t pay my electric, which one is worse?’ observes Tenenbaum. It’s up to the board, he says, “to make it not so easy for a shareholder to withhold payments.”  

 Effective Strategy

 According to Lasser, “The general protocol is, if someone misses a month’s payment they get a notice from management. And then, if they are two months or  three months late [as stipulated in the proprietary lease], the co-op turns it  over to their legal professionals.”  

 “What becomes problematic,” he adds, “is if the board doesn’t do anything. If they let it accrue for a year, or couple of years—if it balloons—by then, the person might not have the money. They might focus on it if you  bring it to their attention earlier.”  

 Also, warns Lasser, “even though there is six-year statute of limitations on a contract claim, if you  sit on your claim,” when you finally do bring it to court, “they will say that your claim is stale and they won’t let you collect the oldest maintenance.”  

 All the professionals agree that building administrators need to follow protocol  uniformly with each shareholder to avoid getting slapped with a discrimination  suit. “You can’t pick and choose who is going to go on legal and who is not,” says Osman. “You must have a set policy and make shareholders aware of it in writing so there  is no misunderstanding.  

 And remind them once a year if you have to, in writing.”  

 The management also needs to follow the tenets of the Fair Debt Collection Act,  the federal consumer protection law which narrowly proscribes the procedure for  collecting debt, including rent and maintenance arrears. The law requires that  notices be sent to shareholders within a specific time frame, alerting them of  their right to dispute the amount owed. Lawyers for the co-op could be to  subject to penalties for violating protocol.  

 At the end of the two or three month interval of nonpayment of maintenance, as  stipulated in the proprietary lease, management should turn the case over to  the co-op’s attorney, who will issue an eviction notice. Promptness is important, as the  legal process can be lengthy and costly.  

 The shareholder has 10 days to respond to an eviction notice. Once they do, the  court date is usually a week later. Most likely they will ask for an  adjournment, which adds more than a month. “So before anything happens,” says Tenenbaum, “they are about four months in arrears.” All in all, it’s not uncommon for a judgment to take six to eight months. And at any time the  shareholder can settle and continue occupancy.  

 “There are some residents who are constantly behind,” says Tenenbaum. “By the time they finish paying up what they owed, they’re already a month or two behind again. So they’re basically just paying twice a year.”  

 To Sue or Not to Sue?

 Whether to sue a resident for nonpayment is a tough call in some cases.  Initiating eviction proceedings with chronically delinquent shareholders each  time they fall into arrears might be a waste of money. “You want to hold off suing for maintenance too often,” advises Tenenbaum, “because you build up a large amount of legal fees.” On the other hand, he adds, “if somebody is doing it on a constant basis, you might want to build up a record  of having to sue them,” which could bolster a foreclosure case down the line.  

 If a shareholder in arrears is subletting their apartment, the co-op is entitled  to collect rent directly from the subtenant when it begins an eviction  proceeding. “That is completely legal,” says Osman. “The tenant starts paying the rent to us rather than to the owner, and we keep  any surplus in an account.”  

 “If the shareholder has a loan,” Tenenbaum advises, “I would strongly suggest that the board notify the bank, because banks do not  want you to be in default of your maintenance payments.” The bank will put additional pressure on the shareholder to pay, and, should  the shareholder fail to do so, “in order to protect their interest they come in and pay the maintenance—to satisfy the outstanding arrears so when they close, they can get clear title.”  

 The service of an eviction notice quickly reveals the shareholder’s intentions. “The ones who are really in trouble will usually come forward and ask for  forgiveness,” says Tenenbaum, “and ask what kind of plan they can work out. It’s not worth dragging them into court. After all, you don’t want possession of the apartment—you want some kind of payment.”  

 One common repayment plan takes a carrot-and-stick approach. The shareholder  signs an agreement to pay current maintenance charges when they’re due, along with a portion of the arrears with each payment. Late fees accrue  steadily, but if the owner sticks to the payment schedule, once the arrears are  paid off the late fees are waived. If he or she doesn’t pay off the debt, the accrued late fees stand and the case goes to court.  

 As for shareholders who ignore late letters and the eviction notice, says  Tenenbaum, “There is no reason not to sue them. And considering the delays in court, you  really have to sue them immediately.”  

 The Co-op as Landlord

 Because of the corporate structure of co-ops, shareholders do not own their  apartment but rather are holders of shares in a corporation, from which they  rent their apartment. As such, lawsuits aimed at collecting arrears are  conducted in landlord-tenant court.  

 “When you are trying to collect money in a co-op,” explains Lasser, “there is a landlord/tenant relationship. You commence a summary proceeding in  housing court for nonpayment of rent. Then you serve a notice of petition.” If the shareholder answers the petition, the court assigns a date for a  hearing. The ideal and most expedient result of a court hearing would be an  agreement on both sides to a structured payment plan, called a stipulation.  

 As for legal fees, advises Lasser, “If you enter into a payment agreement in court and can’t come to an agreement on legal fees, reserve your right to collect later. That  way if the agreement does work out, or if a person decides to sell, you can  probably recover the legal fees then.”  

 Of course, if the shareholder ignores the late letters and court summons, says  Lasser, “you make an application for a default judgment and at that point get a warrant  of eviction.”  

 Of the collection proceedings Osman's company has initiated, “About one-half come up with the money—either they'd always had it, or they get it, often from a relative. Forty  percent of the time the bank that holds the mortgage on the person’s apartment pays the co-op—then works out a deal with the homeowner. And about 10 percent of them actually  go to foreclosure.”  

 As landlords, co-op boards have a strong position in relation to shareholders.  And considering the co-op’s lien priority over banks, says Lasser, “if you act quickly you really should be able to collect.” But you need to keep up your end of the bargain.  

 According to New York City’s Warranty of Habitability, explains Lasser, “if the court determines that the apartment or a portion of it is not habitable—if, for example, there is noise, a flood from an apartment upstairs, a roof leak  or a bed bug infestation—they will give an offset to the maintenance charges just as they would with a  regular tenant.  

 You’ve got to promptly make repairs and address concerns of individual shareholders,  because if you don’t, they can end up getting a maintenance abatement.”  

 Even with most of the dirty work delegated to a management company and attorney,  most board members would probably put collections at the top of their list of  disdainful duties. But through it all, cautions Lasser, “It’s best not to have an us-vs.-them mentality.” After all, in a co-op, us is them.    

 Steven Cutler is a freelance writer living in New York City.