New York's Cooperative and Condominium Community
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An innovative way for condos to handle arrears.
A landmark case is paving the way to easier arrears collection for condos.
When it comes to evicting residents, co-op boards have traditionally enjoyed a bigger arsenal than their condo counterparts. But condo boards are not without their weapons. And that arsenal just got larger, thanks to a major court ruling in The Heywood Condominium vs. Steven Wozencraft.
The case began in April 2007, nearly a year after Steven Wozencraft bought an apartment in the Heywood, a 10-story luxury condominium in Chelsea. According to Jonathan Landsman, his lawyer, Wozencraft “had an extreme financial problem” and stopped paying his common charges. Sixty days passed, after which time the Heywood’s house rule taking away non-essential services kicked in.
When Wozencraft’s financial issue was resolved, Landsman says his client “offered to pay common charges going forward and make a payment plan for claimed arrears as long as the board restored full services.” According to Landsman, the board refused this offer.
In 2013, the board hired the law firm of Schwartz Sladkus Reich Greenberg Atlas, which came up with a different way for a condo board to collect from residents who do not pay. With Wozencraft now owing a claimed $100,000 in arrears, late fees, and interest, the board’s new attorney sought to have the court appoint a receiver, who would have the power to set and collect rent from Wozencraft. If he didn’t pay, the receiver could have him evicted under rental laws, which is not as lengthy a process as foreclosure.
This ability – inherent in existing law but essentially never confirmed by a court until now – means that the receiver, on behalf of the condo association, has the right to evict a unit-owner simply by using the standard eviction court process. The receiver then has the right to use city marshals to physically escort the unit-owner off the premises, change the locks, and rent out the apartment. In order for this method to be utilized, a foreclosure proceeding must already have been initiated. After the rental eviction takes place, the foreclosure case will continue because the board still wants to collect its arrears and see the apartment sold to a new buyer.
But – and this is critical – in order for this technique to work, the bylaws must provide that if the condo forecloses on a unit-owner, it is entitled to the appointment of a receiver. The Heywood’s governing documents contained such a provision, and so a receiver was appointed. When Wozencraft failed to pay his rent, the receiver moved to evict. The courts granted the request. Wozencraft appealed. Finally, in January of this year – in a closely watched ruling – a five-judge appellate panel unanimously rejected Wozencraft’s appeal. He remains in the apartment pending another appeal.
The Heywood’s attorney, Steven Sladkus, says the case provides a road map for other condo boards: “File the common charge lien, move to foreclose, seek a receiver to collect the rent, and if they don’t pay the rent, eject.”
If a condo’s governing documents don’t contain the authority to have a receiver appointed, there are other “nuclear options” to evict a non-paying resident. Instead of waiting for the bank or other lender to foreclose, the board can move to foreclose before them. “It does take banks significantly longer than a condo association to foreclose, which is why I’ve always taken the position you want to be as aggressive as possible,” says attorney Marc Schneider, senior partner of Schneider Buchel.
The condo’s attorney should file a common-charge lien, authorized under the New York State Condominium Act. It allows for foreclosure on a condo apartment – and a subsequent foreclosure sale – when common charges go unpaid.
While filing a lien isn’t expensive, some boards are reluctant to take this step. Since mortgage-holders and tax-collectors have priority over the lien of a condo board, which is third in line to collect, many boards think that filing is a waste of time because after the unit is sold at foreclosure, there may be no money from the sale left over for the condo.
But that’s not necessarily so. Even if a lender has filed a lien, it takes longer for the lender to collect because of legal and regulatory requirements – as well as defenses that a homeowner can raise – that are inapplicable to boards. While it can take more than a year for a condo association’s common-charge lien to reach foreclosure, it can take a lender several years, in which time, the board can take action.
“Aggressiveness by the condo association gives you options: once you foreclose, you can rent the unit,” Schneider notes. “Or you can cut a deal with the mortgage-holder to possibly buy out their position. In some instances, you can find a buyer for the unit and negotiate with the lender so that the bank and the association get paid what they’re owed, or close to it. A private sale will yield more than a foreclosure sale by the lender. So it often make sense for the lender to reach a deal.”
Two More Options
The final two solutions are to go to Small Claims Court or to collect rent directly from a subtenant. For arrears under $5,000 (the limit in this court), you can win a small claims judgment. If the unit-owner is absentee and leasing the apartment, the board can inform the tenant that he or she must now pay rent directly to the condo association. This requires no judicial order, says attorney Dani Schwartz of the firm Rosenberg & Estis. Any board can do it.
Imposing a lien gives you leverage to negotiate a payment plan with the delinquent owner. “I’ve done that,” says Schwartz. “You just want to make sure the board is not prejudicing itself by waiting too long to file the lien or by having no enforcement provisions with any teeth in case the unit-owner doesn’t comply.”
By “teeth,” he means having the unit-owner agree to a foreclosure judgment. But that judgment will only be enforced if the unit-owner doesn’t follow the payment plan. So if they haven’t made payments, the condo doesn’t have to start the process all over again. It just “activates” the agreed-upon foreclosure judgment.
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