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Condominium Liens Which Comes First

Condominium Liens: Which Comes First?


Mortgages or Common Charges?

Condominium boards of managers are increasingly facing situations in which unit owners default on both their common charges and mortgage installments. Board members want to know that they have taken every practicable step to protect their interest in, and to collect, common charges.

The New York Condominium Act grants the Board a lien for unpaid common charges. This lien takes priority over all other liens, excepting only (i) real estate (and, where applicable, school and special district) taxes, and (ii) sums unpaid on a first mortgage of record or on a subordinate mortgage of record by certain state development agencies.[1] Real Property Law, §339-z. The condominium’s lien, then, is superior to recorded second mortgages, which include “credit line” type mortgages given by borrowers who still have an unpaid balance on their first mortgages.[2]

To get the most benefit from the condominium lien it is necessary to file a “Notice of Lien” against the delinquent unit.[3] The filing provides notice to future buyers and lenders that the unit owner was not current in payment of his common charges. There is no reason not to file Notices of Lien promptly,[4] especially since most condominium bylaws provide that the cost of doing so, including reasonable attorney’s fees, is payable by the delinquent unit owner.

The more difficult question is: Should the Board institute a foreclosure proceeding to enforce the lien?

Foreclosure proceedings are most effective in cases where there is no default in the first mortgage. In such cases, when the owner’s equity in the unit is substantial, there is little reason for pause, since the legal fees and costs (which may be in the $3,000 to $4,000 range) are recoverable if the foreclosure sale brings in sufficient cash. However, in most cases, when there is a default in the payment of common charges there is also a default in the mortgage.

In a depressed market lower real estate values may reduce the unit owner’s equity to a point where there is little or nothing left when deducting the balance due under the first mortgage and taxes. When the owner has no equity, recovery of the past‑due common charges and the expenses of foreclosure cannot be assured. Careful economic analysis and consideration of alternatives to foreclosure proceedings is therefore required. The Board should never throw good money after bad. Some of the alternatives are:

1. Continue efforts to induce the unit owner to pay voluntarily. The Board may offer deferred payment terms, conditional upon the giving of additional security,[5] such as a third party guaranty, or a confession of judgment filed or held in escrow. The Board can impose special assessments upon late payers. If the bylaws permit, these can include (i) interest assessment at the highest legal rates,[6] (ii) late charges geared to defray the administrative costs resulting from the delinquencies,[7] (iii) bad check fees to defray bank and administrative costs, and (iv) reasonable attorney’s fees.

Some associations post the names of delinquent members on a bulletin board.[8] Others will withhold certain nonessential services, such as use if the health club or receipt of parcels. To withstand judicial scrutiny the withholding of more essential building services would at least require bylaw authorization. These practices have significant risks that should be carefully evaluated from legal and social view points.

Advising the unit owners’ mortgage holders of the borrowers’ default in common charges has also proven helpful. In many cases the mortgagees have pressured their borrowers to keep current on common charges. They view the default in the payment of common charges as a mortgage default.

In cases of blatant or repeated defaults the Board can require a unit owner (under appropriate bylaws or by threat of lien foreclosure) to post a security deposit or bond to assure future payments of common charges and assessments.[9]

Amending bylaws to provide that the delinquent unit owner must pay the next 12 months’ common charges in advance may also prove an effective remedy. It does not appear to have been litigated in New York for condominiums, and would probably be subject to court challenge, but there is no apparent legal reason for the courts not to enforce this remedy. It was approved in landlord-tenant cases.[10]

1. Institute a legal action against the unit owner, seeking a money judgment for unpaid common charges. This action is independent of foreclosure proceedings and can be brought on without waiving the lien.[11] This procedure is much less costly than foreclosure, and may result in a money judgment obtained by a motion for summary judgment. The judgment, in turn, may be enforceable by wage garnishment and attachment of other assets of the unit owner, including his right to receive rental from a tenant in the unit, and by levy upon the unit owner’s non-exempt personal property located on the premises or elsewhere. One difficulty in this procedure is updating the amount of the requested judgment to include charges becoming due after the action has started.

2. Await the voluntary sale of the unit. If, while he is in default, the unit owner secures a buyer, the law,[12] and most condominium bylaws, require that arrears in common charges be paid from the proceeds of the sale or by the buyer. The buyer will want clear and insurable title. Standard contracts of sale also provide that common charges be brought current at the closing.

3. Await the instituting of foreclosure proceedings by a priority lienor, typically a first mortgage holder, and participate in those proceedings. In mortgage foreclosure cases, the condominium’s lien is paid out of the surplus money, if any, realized by the sale. This occurs after payment of any liens of higher priority and the expenses of the foreclosure.[13]

4. It now appears to be settled law in New York that the buyer at the foreclosure sale of a condominium apartment takes title free and clear of any lien for prior unpaid common charges.[14] The board losses it lien and any rights to collect arrears from the new unity owner. If the lien for unpaid common charges survived the foreclosure (and was collectible from an owner who took title after the foreclosure sale) participants at foreclosure sales would bid lower, reducing the likelihood that a successful bidder would fully satisfying the mortgage. To allow the lien to continue against the foreclosed unit would, in effect, mean that the mortgage lien is not discharged by, and is therefore inferior to the lien of for common charges.[15] Some believe that the resolution of this issue in favor of first mortgage holders makes it easier to obtain mortgage financing of condominiums. However, it also threatens the viability of some condominiums that will lose common charge income when units suffer foreclosure.[16]

To further satisfy lenders, and facilitate the financing of sales, some sponsors have inserted clauses in condominium declarations and bylaws that exempt purchasers at foreclosure sales from an obligation to pay common charges previously accrued. The ultimate resolution of any case on the subject of priorities may well depend upon the wording of these condominium documents.

1. Collect rent from the non-owner occupant.

2. If a unit is occupied by a tenant at the effective date of the condominium plan, or by a person to whom the unit is rented after the effective date, and the non-occupying owner fails to make all payments due on the unit, then the rental payments can be collected by the condominium from the non-owner occupant.[17] This section only applies to residential units, and would not apply to tenants of a purchaser under the plan.[18]

For each presentation to the Board of a new tenancy, it is recommended that, as part of the approval package, the owner and tenant be given a form of direct payment authorization. This would provide that, should the unit owner‑landlord default in common charges the tenant shall pay rent directly to the Board. This may not be an enforceable pre-approval requirement without bylaw authorization, but if it is signed by the parties it should be enforceable.[19]

Most mortgage forms provide that assignments of rental may not be effective against the holder of the mortgage. A Receiver appointed during the pendency of the foreclosure of a lien upon a mortgaged condominium unit may pay current common charges before paying the mortgage installments. He can do this by collecting rent from the occupant.[20]

1. Purchase the unit, either at a foreclosure sale or by negotiating with the owner and first mortgagee. Most bylaws allow the Boards to take title and rent or resell the apartment. Any action to get the unit into the hands of a responsible new owner should be considered. If the matter languishes in a contested foreclosure action, the accumulating common charges may never be recovered. The Board should therefore consider cutting a deal with the owner and the mortgagee. This might involve the transfer of title in lieu of foreclosure. Title may be taken in the name of the Board, or a nominee of the Board. To make such a deal the Board may be willing to compromise some portion of past due common charges.

2. In choosing any of these alternatives, prior consultation with legal counsel knowledgeable in such matters is desirable, for the law on this point is constantly changing. Moreover, it is increasingly common for a unit owner to file a bankruptcy petition. Bankruptcy filings result in an automatic stay of all enforcement proceedings, and tie up the unit with other complications that are too complex to be dealt with here.

3. Prompt action is important. Each month that common charges remain unpaid increases not only the arrears in common charges, but usually also the mortgage principal and interest installments and taxes, making the ultimate resolution even more difficult.

4.

Michael P. Graff

A Member Of

KURZMAN KARELSEN & FRANK
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[1]

[2] Washington Federal Savings and Loan Ass’n v. Schneider, 95 Misc. 2d 924, 408 N.Y.S. 2d 588 (Sup. Rockland, 1978).

[3] Real Property Law, §339-aa.

[4] But, see Board of Managers of 300 West 3rd St. Condominium v. K. B. Chelsea Realty Associates, NYLJ, August 5, 1992, p. 22, col. 5 [Sup. Ct. NY Co.], which states, without a clear explanation, that an anomaly in the law effectively penalizes the board for converting outstanding common charges into a recorded lien because, in the absence of surplus funds at foreclosure, the lien is discharged. The reason for this statement in the Court’s decision is not clear, since the common charge lienor that had not filed its lien earlier is nevertheless a permitted claimant in surplus money proceedings. RPAPL Section 1352.

[5] New York Real Property Act, Section 339-j.

[6] The Board of Managers of the First American Condominium v. Shandell, 143 Misc. 2d 1084, 542 N.Y.S. 2d 466 (Civ. N.Y. 1989).

[7] Late charges of 5% per month on common charges which were two months over-due was held to be void as being usurious. 943 Lexington Avenue, Inc. v. Niarchos, 83 Misc. 2d 803, 373 NYS 2d 787. If the late charge was a single charge of 5%, rather than a monthly recurring charge on the same default (which resulted in a 60% per annum interest rate), the court might have allowed it.

[8] 7 Real Estate Law Journal 216 (Fall, 1976).

[9] Real Property Law §339-j.

[10] Fifty States Management Corp. v. Pioneer, 46 N.Y.2d 573, 415 N.Y.S. 2d 800, 389 N.E. 2d 113 (1978).

[11] See, note 3.

[12] See, note 1.

[13] RPAPL, §1361(1); see, also, Dime Savings Bank v. Miles, (N.Y.L.J., May 15, 1991, at p. 23, col. 2 [Sup. Bx.]).

[14] Bankers Trust Co. v. Board of Managers of Park 900 Condominium, ___A.D. 2d ___, NYLJ, July 22, 1992, p. 21, col.3, which distinguished or overruled Prudential Insurance Co. of America v. Ward,___Misc. 2d ___, 570 N.Y.S.2d 264; East River Savings Bank v. Saldivia, (N.Y.L.J., Oct. 11, 1989, at p. 21, col. 4 [Sup. N.Y.]); Dime Savings Bank of N. Y. v. Kakar, NYLJ November 15, 1991, p 24, col 5 (Sup. Ct.,Queens Co.) and Dime Savings Bank of N. Y. v. Campagna, NYLJ, October 31, 1991, p 27, col 1, (Sup. Kings CO.).

[15] Dime Savings Bank v. Miles, (N.Y.L.J., May 15, 1991, at p. 23, col. 2 [Sup. Bx.]); Long Island Savings Bank v. Gomez, (N.Y.L.J., April 17, 1991, at p. 25, col. 2 [Sup. Queens]).

[16] See, Bruce J Bergman., “First Mortgage v. Condominium Common Charge Lien – in Legal and Political Battle”, New York State Bay Journal, January 1992, 34, 37.

[17] New York General Obligations Law, § 352-e (2-d)

[18] ibid. § 352-eeee(l)(f).

[19] In a case where the Board persuaded a tenant not covered by this section of the law to pay its rent directly to the Board, the Court, while granting an injunction against that procedure, also allowed the Board to collect the reasonable value of the rented unit from the tenant, thus providing the Board with relief that might be the same as if the statute applied. See, Board of Managers of Seaport South Condominium v. 130 Water Street Associates, NYLJ April 8, 1992, p. 28 col. 5 (Sup. Ct., N.Y. Co.)

[20] See, Board of Managers of 300 West 23rd St. Condominium v. K.B. Chelsea Realty Associates, fn. 4 supra.

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