Get Serious About Arrears Before They Spiral

Falling behind on monthly fees might seem like a minor headache, but it can spiral into years of complications, mounting costs, and serious tension between neighbors. Carl Finger, principal at Finger & Finger, breaks down what actually happens behind the scenes when a resident stops paying, and why some boards handle it with ease while others watch a small problem snowball. He shares a case involving an elderly shareholder that shows just how complicated things can get when a board waits too long to act, plus the surprising legal tools available to condo boards that co-ops simply don't have. Finger also gets into the murky question of whether a board can restrict amenities like parking or the pool, and why that strategy usually backfires. Habitat's Carol Ott conducts the interview.

The business of running a building is demanding work that requires making endless decisions — some that can quickly lead your board into a quagmire of legal difficulties. Legal Talk interviews New York's leading co-op/condo attorneys to find solutions, and get some guidance, on these challenges.  For more co-op and condo insights, sign up to receive Habitat's free newsletters or become a Habitat subscriber today!

Transcript

Carol Ott: Residents who fall behind in paying their monthly fees can cause a ton of havoc in building budgets. Many buildings have clear protocols, others not so much, and to add to the challenge, condos have different remedies than co-ops do

Folson Group: I'm Tina Larsson with the Folson Group. We deliver done-for-you property management searches. You make the final call, we handle the rest. Add to that our seamless project management and strategic cost optimization, and you get a partner that empowers boards to make smart, confident decisions that move your building forward

Carol Ott: I'm Carol Ott with Habitat Magazine, and my guest today is Carl Finger, principal at Finger & Finger. Welcome, Carl. 

Carl Finger: Thank you, Carol. 

Carol Ott: So let's talk about both ends of the arrears spectrum, the board who takes action on arrears and the one who doesn't. You have clients with both, so let's start with your co-op client who's on top of arrears.

What was their protocol and how does it work? 

Carl Finger: Well, they have, uh, strict procedures for dealing with arrears, and that allows them to be swift and definitive in the process and in addressing arrears. Typically, uh, the process includes a letter from the property manager when they're a month in arrears, perhaps another letter when they're two months in arrears.

There are subsidiary penalties like late fees, occasionally, uh, sacrifice of a parking space, but ultimately after three months, the referral is made to our, our office for legal action. 

Carol Ott: I wanna jump in. When you say, um- Denial of a benefit, like a parking space. So if you didn't have parking and maybe you had a pool or you had a common area, ca- can you deny that benefit if you're a month late?

Carl Finger: It depends on the operative documents, the bylaws, things of that nature, but I don't strictly recommend that anyway because it becomes very hard to enforce, and we don't want to see altercations at the pool, at the gym. These are the types of services where, uh, boards might try to restrict somebody's use, and but the reality is the enforcement is very limited, and the last thing you want is an altercation.

Carol Ott: And when you said fees or fines, if somebody's, uh, typically, like in this co-op it was your client where they have, um, you know, a well-defined protocol, when does a fine kick in? 

Carl Finger: Well, typically a late fee, um, would be after the 10th of the month or after the 10th of the second month. Um, and usually, the problem is usually it's a modest amount.

You don't wanna run into trouble where a court throws it out, but the flip side of that is because it's a modest amount, it doesn't necessarily get their attention. 

Carol Ott: Right. And 

Carl Finger: so they see it on the bill and don't necessarily do anything. 

Carol Ott: So you had a client who was dealing with arrears from a tenant who was elderly, and the board apparently didn't take action.

So what happened there? 

Carl Finger: So the person, uh, you know, the board was trying to work with them. They were not responsive. Uh, the case went on for some time as a result, and unfortunately, after many months of not taking action, it was referred to us, and the person passed away. Now, that creates a whole host of other complications, and it, it delayed the case, it delayed the collection of the sums by, you know, a multitude of months to years, actually.

Um, the process when someone passes away unfortunately can be attenuated. If there is an estate and they have funds and there are family members, maybe there's a will, then those people can take action, and things can get done in a relatively timely fashion. It is still a delay, and the problem in that situation was that the delay, had they dealt with it sooner, they might have gotten paid before the shareholder passed away and at least avoided some of the, uh, arrears that were sitting on their account for two years.

Um, the problem is greater even- If there is no relative, no family, no will, what happens in that situation is a public administrator has to get appointed. In order to get the public administrator appointed, you need to get a death certificate, and that takes time depending on where the person died. If it's in New York City, it's takes even longer in New York State, and that assumes you have the necessary information to get the death certificate.

Once you have the death certificate, you run into delays related to going to Surrogate's Court. So y- all of this is compounding and meanwhile, you're essen- the shareholders are essentially carrying, um, the cost for an empty apartment and bearing additional fees because all these processes become more expensive for the co-op, uh, for anybody, but the co-op is, is bearing the cost.

Carol Ott: And, and let me ask you those, about those costs. Just give, give me a run-through, aside from a lawyer's fee, what your fee is, what other kinds of costs are there? 

Carl Finger: Well, there can be, uh, extensive costs from everything from process servers' fees, private investigator fees, you know, each of these might be hundreds of dollars, um, to potentially publication fees, depending on what happens with the estate, that can run several thousands of dollars.

So certainly the costs can go up astronomically depending on the circumstances. 

Carol Ott: Okay. I wanna turn to arrears in a condominium because that's a different kettle of fish. How are the collection options different in a condo? 

Carl Finger: So in a condominium, you certainly have some of the same concerns about delay, if the worst-case scenario, if somebody passes away, et cetera.

The procedure, however, is more attenuated to begin with. You really have three options. One is if there's a tenant, you can serve a notice to collect the rent that the tenant should be paying to the unit owner and ask them to pay it directly to the condominium. If that works, great. Unfortunately, it is a law without a lot of teeth, and you may be still pursuing the unit owner.

The second way is to pursue the unit owner in civil court and get a judgment for the money they owe. The problem with that is you're s- you have a judgment, and you have to then get a remedy to collect on the judgment. So the third option, which is the most common and most productive, is the foreclosure, and that starts with filing a lien against the unit and then proceeding to an actual foreclosure in court where you file a lawsuit for foreclosure, and then there's a procedure gets followed, and eventually, if they don't pay, hopefully they'll pay at some point based on the additional pressure.

If the unit owner really does not pay, eventually the unit would go to auction, and the condominium would get their money through the successful bidder or bidding themselves. Um, there are some downsides to that which is if there is a first mortgage on the property, the condominium can be wiped out by the first mortgage holder's foreclosure.

And the problem there is that if the first mortgage takes some time to be, uh, foreclosed on, it, it delays the condominium being in a position where they can, um, get their money start-- get, get the condominium common charges started paying, uh, through that foreclosure. 

Carol Ott: I wanna, I wanna go back to the, your first remedy, which is if the condo unit is rented out Talk to me about how the board would approach that tenant to basically say, you know, "Your owner is not paying us our common charges.

Can... We want you to pay the rent to us directly." How, how do you assure that renter that they won't-- that the owner's not gonna come after them legally? 

Carl Finger: Oh, so there is a specific provision in the law where you have to make a certain demand, and we prepare a, basically a legal notice that is a very formal and, um, a formal notice to the u- to the tenant.

Now, it indicates a variety of factors, and one of the things we do to try and work with the tenants if we can get them to contact us and cooperate is we have given, um... I mean, they're, they're not responsible under law if they pay the rent to the condominium. But we've also given them written assurances that if the, if the unit owner, uh, brings a case against them or tries to get the rent from them, that the condominium will provide protection to them, and sometimes that encouragement helps.

Carol Ott: That makes a lot of sense, 'cause if I was a renter, I would be quite nervous, actually. 

Carl Finger: Yeah, it's a g- it's a legitimate concern. Um, we try to reassure them and we try to give them appropriate documentation, and we suggest to our condominium boards that they essentially indemnify them, because if y- if they're doing what we want and they end up having a problem with a unit owner because of that, it seems reasonable that the condominium would give them that protection.

Carol Ott: Right. So in conclusion, what's your advice for boards, whether in co-ops or condos, for crafting and enforcing an arrears policy? 

Carl Finger: I think there's two parts. One is to have a rock-solid policy that is, um, clear, that is shared out with the community, that everybody knows what the ramifications are should they fall into arrears.

Um, hopefully that will encourage people, A, not to fall into arrears, and B, if they have a problem, to reach out to the board and try and deal with it early on, uh, before it gets overwhelming. And that's one of the reasons why the process should have a nice letter, a firm letter before it goes to legal.

The second part of having this process is following the process. Uh, that's obviously important to make sure that it's effective, but also in this day and age, we wanna make sure that all our processes are followed the same and that nobody is i- able to claim that, "Well, you, you are discriminating against me by putting your process in, in this case, when you didn't follow it in all these other cases."

So that's sort of a secondary but no less important, uh, protection that we get when we follow our procedures, uh, firmly, strictly. 

Carol Ott: Right. And, and is the procedure, is, would the board create this procedure and then if they switch management companies, that procedure is in place regardless of who the management company is?

Carl Finger: Yes. I think it should be the board procedure and the managing agent should follow it. At the initial adoption, it does make sense to consult with both your attorney and your property management company at that time, because they'll have some good feedback and they may have had some success doing it a certain way, and it's worth getting the, uh, information from the agent and the attorney.

Carol Ott: Okay. Terrific. Thank you so much. This has been very valuable information. 

Carl Finger: No problem. Thank you for having me, Carol.