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When You Need More Power to Collect …

Maintenance charges are the lifeblood of a cooperative, just as common charges are to a condominium. Without maintenance, there is no ability to pay the cooperative’s bills as they become due. Under the standard form of proprietary lease, maintenance is to be determined annually based on the expenses of the building. You take the annual expenses divided by the number of shares and each shareholder pays a prorata share of the maintenance.

How can we strengthen the maintenance provision of the lease to make it easier to collect when a shareholder falls into arrears?

The first thing to do is to ensure that all charges, such as late fees, are specifically allowed in the proprietary lease. We would recommend a specific percentage or amount, or at least give the board general discretion to set late fees that would be deemed “additional maintenance,” because that is a catchall phrase. You should do the same thing with legal fees. The provision should state clearly that additional legal fees incurred by the cooperative are deemed “additional maintenance” because only maintenance is collectible in a summary proceeding.

The standard form of proprietary lease talks about maintenance being based on operating expenses. There are times, however, when a cooperative has to undertake capital work and is going to impose assessments to fund those repairs. That is generally considered to be additional maintenance, and you probably don’t need to change anything in your lease. Nonetheless, it might be a good idea to spell it out. The provision should be clear that any assessment for capital repairs or other needs of the cooperative outside of operating expenses is designated as additional maintenance. Explaining that makes the provision easier to enforce.

Remember: a cooperative and its shareholders are in a landlord-tenant relationship, so if the shareholder doesn’t pay his maintenance, you’ll be taking him to housing court. If he doesn’t pay what the housing court orders, he’ll be evicted. But the housing court is going to order eviction for non-payment of maintenance, not for other violations. Therefore, you want to clearly define that the assessment is going to be considered additional maintenance, even if it’s specifically for capital expenditures.

When amending the proprietary lease, you should also specify that any payments made by a shareholder are going to be applied to the oldest arrears, even if the shareholder is making specific designations for that payment. If somebody’s in arrears for six months and then tenders a check for the latest month, it’s much better for you as a cooperative to have it apply to the oldest arrears. If it’s set forth in the proprietary lease that this is how maintenance will be applied, the courts will generally enforce it.

Finally, on my personal wish list for changes in this area: I would love to see a provision that clarifies when legal fees will be awarded to the prevailing party. I’ve seen many situations in which a shareholder withholds maintenance because there’s a condition in the apartment that allegedly breaches the warranty of habitability, and the shareholder gets some type of minimal relief, such as a 10 or 15 percent abatement. The court may well say that the co-op is not a “prevailing party,” even though it received 85 or 90 percent of what was due. Sometimes the court even determines that the shareholder is the prevailing party in circumstances where the cooperative recovered most of what was owed.

It would be great if there was a provision in the lease that says that unless a shareholder receives an abatement greater than X percent, whether it be 15 or 20 percent, the parties agree that the cooperative would be considered a prevailing party and be entitled to having its legal fees paid by the shareholder. Whether a court would enforce such a provision or not is unclear. But if it’s in the lease, and the shareholders approve the change – any amendment to the proprietary lease is generally going to require a shareholder vote – it has a pretty good chance of being upheld by the court.

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