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For Financial Stability, Co-op Boards Must Swiftly Address Delinquent Shareholders

Carolyn Rualo, Partner, Adam Leitman Bailey, P.C. in Board Operations

New York City

Maintenance arrears in a co-op can put a strain on the finances of the corporation. When a shareholder is in arrears, the board needs a strategic approach balancing the legal requirements of the situation with the specific circumstances of the defaulting shareholder. Familiarity with the proprietary lease terms is key, as is collaborating closely with legal counsel and prioritizing timely actions to uphold the financial integrity of the co-op. 

Management’s role. Management needs to be diligent in checking for timely payments from shareholders at the beginning of each month. Once a shareholder falls behind and is five days late on the maintenance payment, co-op management should get board approval to speak to counsel and determine what course of action to take. Depending on the proprietary lease, counsel can advise the board on whether to commence a non-payment proceeding to recover the maintenance — and evict if payment isn’t made — or a holdover proceeding, seeking payment and possession of the apartment. Some of the more aggressive boards will engage in both shareholder negotiations and legal proceedings. Other boards may prefer to communicate with the shareholder, give them some time, see what the circumstances are, and then make a determination on how the board wishes to recover the funds.

Conditional limitation provision. In some cases, the proprietary lease will provide for what’s called a conditional limitation provision, which spells out a timeframe within which the shareholder, once given written notice, may cure the default. If a shareholder fails to cure, then this provision will spell out the timeframe within which a notice of termination can be provided. If the proprietary lease is silent on the conditional limitation provision, the board can seek payment by commencing a non-payment proceeding. The procedural rules that govern this are spelled out in the real property and proceedings law. It starts with a five-day notice, followed by a 14-day payment demand, and then the corporation can begin the non-payment eviction case. These types of proceedings take a long time to litigate. You could be in a non-payment eviction proceeding for up to a year. As a result, the board needs to act promptly. 

Reaching a settlement. Many times these legal proceedings are resolved by a stipulation of settlement wherein the board would have a built-in remedy. Generally that remedy is eviction in the event that the shareholder does not make payments. The resolution that often makes most sense in a non-payment case is to enter into a payment plan where the shareholder can catch up. If the shareholder still doesn't pay, then at least the corporation has a built-in remedy to evict. Even so, the shareholder’s defense is important. If the case becomes contentious where, for example, there are allegations the co-op failed to make repairs, then the shareholder will argue that paying maintenance is not required because of the corporation's default in meeting its obligations. Often these cases are resolved by a settlement agreement well before summary judgment or a trial.

Legal fees. The proprietary lease will typically set forth a legal fee provision allowing the co-op to pursue the recovery of legal fees in the litigation. Co-ops can also recover legal fees when the shareholder tries to transfer the shares as a condition of closing on a future sale. Generally speaking, a prevailing party is entitled to the recovery of legal fees. 

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