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An Effective – and Cost-Effective – Way for Co-ops to Collect Arrears

Bill Morris in Legal/Financial on August 30, 2018

New York City

Collecting Arrears
Aug. 30, 2018

When a co-op shareholder falls behind on monthly maintenance payments, the members of the co-op board frequently find themselves in a sticky situation. On the one hand, they don’t want to be heartless toward a neighbor who might have fallen into financial difficulty; on the other hand, they have a fiduciary duty to balance the books of the corporation. What’s the best course of action? 

Most co-op proprietary leases have a mechanism in place for collecting arrears. In many cases, the board’s management company will send a letter to a shareholder after one missed payment. After a second missed payment, the board’s attorney will send a “notice to cure,” threatening to take the shareholder to Housing Court if arrears are not paid. Some boards impose late fees. Some try to negotiate a payment plan. Others withhold amenities – parking space, voting rights, use of community spaces – to induce delinquents to pay up. 

Since a co-op corporation – unlike a condo association – has the first lien on apartments, the board has considerable muscle: the power to evict the delinquent shareholder for breach of the proprietary lease. With this in mind, some co-op attorneys notify the shareholder’s lender of impending legal action – in the hope that the lender will step in and pay the arrears in order to protect the loan’s collateral

Peter von Simson, chief executive officer of New Bedford Management, recommends an alternative to having the co-op’s general counsel pursue arrears through Housing Court. “We recommend to boards that they hire a different law firm that specializes in landlord-tenant cases,” von Simson says. “What we’ve found is that we get a better product from both sides. The co-op’s general counsel doesn’t have a ton of time. They’re dealing with capital projects, contracts, maybe refinancing the underlying mortgage – big, time-sensitive issues. Arrears can get pushed to the bottom of the list so they drag out longer.” 

For landlord-tenant lawyers, on the other hand, the job is much more tightly focused. “L-T lawyers are always at the courthouse,” von Simson says. “They don’t cut deals, they go by the book. An L-T lawyer is continuously pushing forward an arrears case until it’s resolved. And they’re always providing timely updates because that’s all they do. It’s a different skill set.” 

To collect arrears, New Bedford frequently turns to the law firm Sontag & Hyman. Marc Hyman, a partner, says the firm specializes in landlord-tenant work, and about half of its workload involves co-ops in the city and on Long Island. For pro-forma filings and paperwork, the firm bills clients a set fee instead of an hourly rate. “It’s cheaper for the client,” says Hyman. “Typically we’re running around trying to get things done. Housing Court is its own beast.” 

Von Simson stresses that co-op boards should view Housing Court as a last resort – and that there are proven ways to avoid going there. “Good protocols make good neighbors,” he says. “Everyone in the co-op should know that, no matter who you are, if you don’t pay your maintenance for 60 days, 90 days, whatever the protocol says, the matter is going to court. Everyone needs to know what those protocols are, and that they’re applied evenly. Where boards get into trouble is by treating people differently, trying to review each case. That can lead to a lawsuit against the board. Good intentions can result in very messy situations.” 

In the end, he says, it all comes down to an unyielding fact of life: “Everyone has to pay their fair share for a co-op to work.”

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