The collection of monthly maintenance or common charges is one of the primary fiduciary duties of every board. While approaches to dealing with a shareholder who falls behind vary, a question will always arise: who should collect arrears? Most co-op governing documents have a series of protocols when a resident fails to make monthly payments. Typically, the managing agent sends a letter, followed by a default notice prepared by the co-op’s lawyer. “We make sure that the default notice already includes the legal fees and the disbursement that occurred in connection with it,” says attorney Marc Schneider, managing partner at Schneider Buchel. “If the two months plus legal fees are paid, nothing bad is going to happen. If you don’t pay it, we will bring a summary proceeding to evict you.” (The process is different in condos, where the mortgage lender has first lien on the property.)
“Co-ops should use a law firm that specializes in the representation of co-ops,” says Schneider. “They are familiar with the co-op documents, and in my opinion they’re going to be more successful than anyone else recovering the maximum amount of money.”
Peter von Simson, chief executive officer of New Bedford Management, takes a different tack when going after arrears. “We recommend to boards that they hire a law firm that specializes in landlord-tenant cases,” he says. “The co-op’s general counsel doesn’t have a ton of time. They’re dealing with time-sensitive issues like capital projects, contracts, maybe refinancing the underlying mortgage. Arrears can get pushed to the bottom of the list.”
Using a landlord-tenant lawyer to collect arrears will also be less costly for a shareholder – a possible consideration when the board knows a resident has fallen on hard times. Schneider counters that the board’s legal obligations must override such neighborly considerations. “The co-op board has a fiduciary duty to protect all the other shareholders who are paying their maintenance,” he says.
Furthermore, Schneider contends, some people are simply manipulative. “Often they understand the game very well and know exactly how far they can go,” he says. “That’s why you want a specialist who is familiar with all the available remedies.”
Though Schneider and Von Simson might disagree on who is best suited for collecting arrears, they agree that boards need to follow procedures spelled out in the governing documents. “Everyone needs to know what those protocols are and that they’re applied evenly,” Von Simson says. “Where boards get into trouble is by treating people differently. That can lead to a lawsuit against the board.”