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Arrears in condos and benchmarking submission requirements for co-ops.
AUTHORRobert Tierman, Geoffrey Mazel
Attorneys Robert Tierman and Geoffrey Mazel offer advice on the following co-op and condo legal issues:
In a condo, should a board attempt to collect late common charges, or allow the units to go into foreclosure?
What are the consequences to filing a benchmarking report late, and how do we know if we have to file one?
Read this article in the digital edition.
Arrears in a Condo
By Robert Tierman
Our condo has three unit-owners behind on their common charges for many months. They also have not been paying the assessment that we have. Somebody told one of my fellow board members that it is a waste of money for us to try to collect this money, and we should just let their banks foreclose and put in some new owners. That is shocking to me. Is it true?
Condos are not in an ideal position to act in this all-too-common situation these days. Lenders holding first mortgages on condo units have priority in the foreclosure sale of condo units ahead of the condo in which the unit is located (unlike the situation for co-op units, for which co-ops have priority ahead of such lenders). So, if the amount of the first mortgage loan is more than the value of the unit (i.e., the unit is “underwater”), or even close, then, even in the best of circumstances, your condo could invest a lot of time and money taking legal action against a defaulting unit-owner, and end up losing far more than just the amount of those arrears. This reality has produced a variety of far-from-perfect courses of action for a condo in the situation (usually in the event of a unit-owner default) in which the defaulting unit-owner has a mortgage loan on the unit.
The most basic action is to arrange for your attorney to file a notice of lien against the unit. From the time of filing of the lien, creditors beyond the holder of the first mortgage (and certain taxing authorities) will be prevented from gaining priority over the condo. This is a relatively inexpensive procedure but does little to compel the unit-owner to pay, or even to compel the lender to foreclose. Indeed, the threat of filing the lien, usually made in letters from the condo’s property manager and then the attorney, has far more potential for inducing payments than the filing itself.
Action after the lien filing requires serious cost-benefit analysis in consultation with your attorney. On one end of the spectrum, you are trying to implore or coerce the first mortgage lender into taking action and hope that there is enough left after the foreclosure sale of the unit to satisfy amounts owed to the condo as well as the lender. Or better yet, the lender’s action will induce a resolution between the lender and unit-owner in which the lender will require that the unit-owner clear up past debts and remain current with the condo.
On the other end of the spectrum, the condo can take direct action by foreclosing, and, in the right circumstances, seeking the appoint-ment of a receiver to collect rent on the unit and pay a portion of it to the condo while the foreclosure action is pending. Or you can simply sue the unit-owner for the arrears. The goal there is to secure a judgment against the unit-owner that could be executed against some of the unit-owner’s assets beyond the unit itself. That can remain in place for up to 20 years.
By Geoffrey Mazel
I live in a small co-op in Brooklyn, and I am president of the board. Our building is self-managed. I recently spoke to a friend who is on his board and he mentioned the New York City benchmarking submission requirement. Our building never made a benchmarking submission and was wondering, are all co-ops required to submit a report? What are the consequences if we submit late?
In December 2009, the New York City Council amended the administrative code to require owners of real property to submit a report to the city, benchmarking the energy and water efficiency of buildings. This was part of four legi-slative components known as the “Greener, Greater Buildings Plan” designed to increase energy efficiency and reduce carbon emissions from New York buildings. These laws require annual energy efficiency benchmarking that will be disclosed to the public and mandate a set of energy-efficient upgrades. The first component of these laws is known as Local Law 84, which requires the benchmarking of buildings. This is probably the law your friend was referring to in your conversation.
Local Law 84 requires the sub-mission of an annual benchmarking report by New York City building owners. However, it is important to note that this law applies only to buildings that exceed 50,000 gross square feet. Let’s hope your co-op does not exceed that, exempting you from the requirement. All covered buildings under Local Law 84 should have received a letter from the Department of Finance titled “Requirement to Benchmark Energy Usage,” which would have outlined your building’s obligations under this law.
If you never received this letter, that may be an indication that your building is exempt from this submission requirement based on the size of your building. I strongly suggest you check the New York City Department of Buildings (DOB) website to see if your building is on the list of those covered.
The scenario outlined above is the best-case scenario. If your building is on the list of covered buildings and/or you have been receiving the compli-ance letters from the DOB and still have not made the submissions, you need to contact a professional immediately. Most of these submissions have been prepared and submitted by consulting engineers. The extended deadline for the 2011 submissions was December 31, 2011, so time is of the essence to do this immediately.
What are the ramifications for non-compliance? According to Local Law 84, “it shall be unlawful for the owner of a covered building to fail to benchmark.” On March 30, 2011, the DOB released a set of rules regarding benchmarking. This notice states that failure to benchmark by August 1, 2011, or by May 1 of subsequent years, may result in a penalty of $500. Continued failure to benchmark may result in additional violations on a quarterly basis and an additional penalty of $500 per violation.
As you can see, if your building is covered by this statute, noncompliance can be quite costly.