ADA M LEITM A N BAILEY, P.C.WE GET R ESULTS

The New Foreclosure Laws and Decisions and How to Use

Them to Effectuate Foreclosures

Vital Legal Principles in Building Management

By Adam Leitman Bailey, Leni Morrison Cummins, and Dov Treiman* Foreclosures Both coops and condos have forms of foreclosures on individual units in the

event of nonpayment of maintenance or common charges. Since in coops, the first

step is Housing Court, the actual process of foreclosure to resell the apartment is

too legally technical to be of particular concern to building managers. However,

while foreclosure is the last step in a coop, it is essentially the first step in a condo.

Remembering that a condo unit is in many respects like a one family home,

condo common charges are in many respects like the mortgage on the one family

home – a second mortgage at any rate. However, unlike a mortgage where the

amount of the loan theoretically goes down over time, common charges generally

continue to accrue. Thus, when a condo owner is in arrears, the attorney for the

Board files a Notice of Lien. That Notice serves to protect the Board both as to the

amounts due at that time and as to the amounts that continue to accrue during the

foreclosure process. Since the Board’s lien is second in priority against any bank

mortgage and since bank mortgages nowadays frequently exceed the value of the

property, the Board has little hope in collecting anything in a foreclosure process

that goes all the way to sale of the unit except the unit itself. Even then, the bank

is more likely to acquire the unit than the Board is, but upon completion of the

foreclosure process, the Board can expect that the new owner of the unit will at

least be paying common charges. The rest of the money the old unit owner owed is

most likely a write off.

So, viscerally, it may seem like it doesn’t pay to foreclose for nonpayment of

common charges. But the Board has no choice. If it makes a policy of not

foreclosing for nonpayment of common charges, there is little motivation for any of

the unit owners to pay their common charges. Foreclosure, expensive and clumsy

as it is, is mandatory for the prudent Board and it will simply have to budget

around this unit.

The prospects aren’t quite so bleak if the unit owner has a tenant. The law

allows the Board to collect the rent directly from the tenant, although methods of

compelling it are expensive and difficult. Frequently, however, collecting the rent

from the tenant puts the unit owner in the position of having no income with which

to pay the mortgage and a settlement of the various parties claims may rapidly

follow.

* Adam Leitman Bailey is the founding partner of Adam Leitman Bailey, P.C.. Mr. Treiman is a

partner and Ms. Cummins is an associate in the firm.

BOARD COLLECTS COMMON CHARGES WITHOUT JUDICIAL INTERVENTION BY NOVEL AGREEMENT AND DEED IN LIEU OF FORECLOSURE With the recent economic downturn, condominium boards have been plagued by unit owner common charge defaults. With less unit owners paying their common charges Boards are faced with the prospect of increasing common charges in order to collect the deficit from those unit owners in good standing -- unless they can collect the unpaid common charges from the delinquent unit owners. Most Boards who attempt to collect common charges from delinquent unit owners are faced with essentially three choices – enter into a payment plan with the defaulting unit owner, sue for money damages, or foreclose. The problem with the payment plan option is that when a unit owner misses a payment, the Board must start an action, which takes time and money. This is really just delaying the inevitable. If a Board decides to go straight to court (small claims or otherwise), the Board may succeed in getting a judgment on the outstanding common charges, but would have to commence consecutive actions in order to keep collecting the common charges as they continue to accrue. Also, collection on the judgment(s) may be impossible. This starts a cycle of continuous legal bills and unpaid common charges. The third option, foreclosure, is the clear choice of these three options because, theoretically, a Board will be made whole by the sale of the unit. However, especially with the recent regulations creating more red tape for foreclosure proceedings, this can be a long process. Our office has created a fourth option, which blends the benefits of the three standard options. Two years ago, the Board of Managers of a three tower 250 unit condominium retained our firm and advised that a large percentage of the unit owners were delinquent in common charge payments. The Board further advised that prior counsel had employed a collection plan involving payment plans and suits for money judgment. Many unit owners already had numerous judgments against them, but no money had actually been collected. We realized that we needed a new collection method that would keep us out of court, incentivize unit owners to make payments, and would rid the condominium of those unit owners who had no way of keeping up with their common charge obligations going into the future. The result was an agreement that included a payment plan secured by a deed in lieu of foreclosure (“DILF”). The DILF is executed simultaneously with the agreement and held in escrow by our firm during the term of the payment plan. The DILF is released to the Board for recording if a payment is missed and not cured within 10 days. Also included in the agreement is a Notice to Quit, which, as part of the agreement, is deemed to have been duly and properly served upon the defaulting unit owner on the 15th day succeeding the date of the recording of the DILF, and which further obligates the unit owner to vacate the unit on the 27th day after recording. Therefore, if a unit owner defaults on its obligations under the payment plan (and does not timely cure), not only will the Board become the record owner of the unit, but will gain possession via the Notice to Quit within 27 days thereafter. Essentially, the agreement tests a delinquent unit owner to determine whether he or she can catch up on their unpaid common charges under the payment plan and become a unit owner in good standing. If they can – the common charges are paid in full and the unit owner keeps his or her unit. If the unit owner cannot – the release of the DILF shortcuts the entire foreclosure process and rids the condominium of a unit owner who cannot keep up with his or her payment obligations. The Board was able to collect most of the unpaid common charges without incurring significant legal expense or spending years in court, and the rate of common charge delinquency has dropped substantially. By utilizing this method, the Board avoided raising common charges for all unit owners.