Robyn Nolan Howlett - New Jersey Law Blog

Collecting Unpaid Common Charges in New York

rhowlett@stark-stark.com (Robyn Nolan Howlett) — Tue, 11 Mar 2008 13:45:21 -0500

Common charges are essential to the operation of a condominium association. Such charges pay for the care and maintenance of the buildings and grounds, on-site staff, upkeep of recreational facilities, etc. If owners falls behind in common charge payments, the building may face difficulties paying for operating expenses. When owners default on their obligation to pay common charges, the shortfall is borne by the other unit owners by way of increases in common charges or assessments.

Most governing documents, whether it be the master deed or the by-laws include a provision that provides that every unit owner, by acceptance of a deed or other conveyance agree to pay the condominium association all common expense assessments contemplated in the governing documents. No unit owner may waive or otherwise avoid liability for common charges by non-use of the common elements or for any other reason. If a unit owner falls into arrears, the board of managers (the “Board”), on behalf of the unit owners, shall have a lien on each unit for the unpaid common charges together with interest. The Board may institute foreclosure proceedings. Foreclosure proceedings are most effective in cases where there is no default in the first mortgage as the first mortgage takes priority over a condominium lien. 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 are recoverable if the foreclosure sale brings in sufficient cash.

Another way to collect unpaid common charges is to sue the delinquent owner for breach of contract due to his or her failure to pay the common charges and obtain a money judgment. Enforcement of the money judgment requires the marshal or sheriff to levy on the judgment. This is effectuated by taking the debtor’s personal property, freezing bank accounts and garnishing wages. Enforcing a money judgment depends on whether personal property exists and/or can be located. It also depends on whether or not the debtor is employed. Utilizing this legal method should be considered on a case by case basis.

Pursuant to the New York Condominium Act, Article 9-B, Real Property Law (the “Condominium Act”), Section 339-kk, the Board may collect rent payments from any tenants occupying a unit. The Condominium Act requires that notice be sent to the tenants advising them to make monthly rental payments to the Association rather than the landlord. If the tenant fails to make such payments, the association can pursue legal action against the tenant and the unit owner.

Regardless of which action the Board decides to take to collect unpaid common charges, it is critical that action be taken promptly. It is important that the Board institute a strict policy regarding collections and strictly adhere to same. Often times, upon receiving notice of the default, owners will negotiate a settlement and/or payoff plan to satisfy the default. In the end, the Board must consider its needs and make the best decision possible to ensure that common charges are collected and the operation of the association is not affected by delinquencies.

Eliminating the 80/20 Rule Offers Tax Relief to New York City Co-ops

rhowlett@stark-stark.com (Robyn Nolan Howlett) — Tue, 04 Mar 2008 08:01:23 -0500

We all want to enjoy tax benefits and increase the value of our homes. Well, New York City co-ops were formally restricted in that respect pursuant to Section 216 of the Internal Revenue Service (“IRS”) code. This federal tax rule (also known as the “80/20 Rule”) required residential co-ops to get at least 80 percent of their gross income from their tenant-shareholders and no more than 20 percent form other sources like commercial rents. The rule was created in the early 1940's when Congress sought to give co-op shareholders tax deductions yet wanted to keep commercial corporations from taking advantage of tax benefits (these benefits include deductions for property taxes and mortgage interest, and the shielding of up to $500,000 from capital-gains taxes when the co-op is sold). Under the 80/20 rule, New York City co-ops routinely rented commercial space at bargain rents and charged the shareholders higher maintenance charges in order to fall within the proper percentage to receive tax benefits. If a building did not qualify under the 80/20 rule it would lose its legal status as a co-op and shareholders would lose the tax benefits granted to homeowners.

The Mortgage Forgiveness Debt Relief Act of 2007, signed by President Bush in December 2007, relieved co-ops from having to give up money in rental income or risk losing their status as a housing cooperative under federal tax laws. The new law requires a co-op to pass one of three tests to enable the shareholders to qualify for tax benefits. The first test is the original 80/20 rule. The second test requires 80 percent or more of the total square footage of the corporation’s property is used or available for use by the tenant for residential purposes. The third test requires at least 90 percent of the income be for the benefit of the shareholders (including but not limited to maintenance, management or care of the property). This new law makes it easier for co-ops to qualify for the tax benefits. It increases the co-ops’ ability to charge market-rate rents for commercial space, keep maintenance charges lower for shareholders and still receive the same tax benefits of an owner of a condominium or single family residence. This new law will ultimately increase the value of the co-ops and will make many shareholders of co-ops very happy.

Pending Litigation Impacting NY Condominiums and Cooperatives

rhowlett@stark-stark.com (Robyn Nolan Howlett) — Thu, 13 Dec 2007 08:08:28 -0500

There are basic laws that governs condominiums (“condos”) and cooperatives (“co-ops”) in New York. Condos are governed by the New York Condominium Act, Article 9-B, Real Property Law (the “Condominium Act”). Co-ops are governed by the Business Corporation Law. There are always new issues that arise requiring new laws that impact residents of New York condos and co-ops.

One bill in New York that has many residents, board members and managers concerned is the “Fair and Prompt Disclosure Act”, also known as Intro 119. This bill would require co-ops to provide specific reasons for the rejection of any potential purchaser. This bill is at the City Council level and is the same as the bill in Albany under consideration, AO1000. Bill AO1000 requires co-ops to provide a prospective purchaser with a written statement of reasons when withholding consent to purchase and voids any agreement inconsistent with such requirement. Those who support these bills contend that there is a problem spreading throughout NY relating to discrimination. Those who oppose the bill rely upon the current laws already in place that prohibit discrimination. For more information pertaining to this bill, please view the blog posted by Jonathan H. Katz, Esquire of Stark & Stark entitled “Shining a Light on the Co-Op Approval Process” posted on July 10, 2007 here.

Another bill, Bill A3677, has been referred to the judiciary to amend the real property law, in relation to requiring hearings before placing liens on condominium units. This bill would require boards of managers of condominiums to provide a unit owner with an opportunity to be heard prior to placing a lien on such person`s condominium unit. Currently, condominium owners who withhold payment on common charges because the board of managers has failed to repair problems, which fall under the board`s responsibility, face having liens placed on their property. A condo owner with a lien on his or her condo is unable to sell his/her property and is in jeopardy of damaging his/her credit rating and ability to obtain loans. This bill seeks to protect New York State`s many condo owners from unreasonable financial hardship by requiring that boards of managers provide unit owners with an opportunity to be heard.

Another bill in Albany that relates to condos an co-ops in New York is A00475. The bill would require the licensing of building managers of multiple dwellings. It will also prohibit owners from operating without a licensed manager. Managers would be required to take building management courses with minimum a number of hours of classroom work conducted or approved by department of buildings. The bill provides criteria for determining competency to receive a license, how to apply for a license and the revocation and suspension of a license. It addresses judicial review of department of building’s decision to grant, refuse or renew and revoke a manager’s license.

While some legislation is enacted to protect owners and/or residents, Bill A6155 expands the authority of the board of managers. This bill will allows a board of directors or board of managers to take appropriate action against an objectionable tenant who fails to comply with the by-laws or rules and regulations of the condominium or homeowners association. Failing to comply to the by-laws or rules and regulations of a condominium or homeowners association in a proper case would be grounds to bring a summary dispossess proceeding against the tenant of a non-occupying unit owner, giving the board of directors or board of managers another avenue of appropriate action.

There are many local, state and federal bills in consideration. It is imperative for owners, managers and board members to closely monitor court decisions and legislation affecting co-ops and condos. We will continue to monitor pending legislation and provide timely updates as to the progress of same. If you would like to discuss any of the above referenced issues or how they affects your condo or co-op in greater detail, please contact Robyn Nolan Howlett, Esquire at rhowlett@stark-stark.com.

New York Cooperatives and Condominiums - Judicial Review of Board Decisions

rhowlett@stark-stark.com (Robyn Nolan Howlett) — Thu, 20 Sep 2007 08:09:28 -0500

As New York cooperative and condominium home ownership has grown, disputes between tenants-owners and governing boards have landed in the court system. Courts have noted that cooperative or condominium associations are quasi-governmental “a little democratic sub society of necessity”. Like a municipal government, governing boards are responsible for running the day-to-day affairs of the cooperative and condominium and to that end, often have broad powers in the areas that range from financial decision making to promulgating rules and regulations regarding pets and parking spaces. See Levandusky v. One Fifth Ave. Apt. Corp 75 N.Y.2d 530 (App. Div. 1990).

The court in Levandusky determined that to best balance the individual and collective interests at stake, the proper standard of review concerning board decisions is the business judgment rule. This rule prohibits judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes.

The prospect that each board decision may be subjected to full judicial review hampers the effectiveness of the board’s managing authority. The business judgment rule protects a board’s decision and managerial authority from indiscriminate attack. At the same time, it permits review of improper decisions when the challenger demonstrates that the board’s action had no legitimate relationship to the welfare of the association or acted outside the scope of its authority.

A party challenging board action must demonstrate a genuine and material issue as to whether a board acted outside the scope of its authority, in bad faith, or other than in furtherance of the welfare of the community. Courts have upheld decisions of boards when it related to handicap accommodations, alterations and repairs, objectionable conduct, financial issues, and issues relating to the adoption of house rules. The standard for judicial review as determined by Levandusy has remained the standard. All a board is required to do is demonstrate that they acted in good faith and in the best interests of the community. The board does not have to prove its reasonableness or prove that it was the right decision but rather a board need only show that it made a decision based upon relevant facts, acted within the scope of its authority and acted in furtherance of the community’s purpose.

As long as the board acts in accordance with its scope of authority, acts in good faith and makes its decisions in furtherance of the welfare of the Association, the court will give deference to the board when one of its actions is challenged.

Rights and Responsibilities of Condo and Co-op Boards in New York

rhowlett@stark-stark.com (Robyn Nolan Howlett) — Tue, 08 May 2007 08:02:42 -0500

New York Cooperative housing corporations and incorporated condominium associations are subject to stipulated requirements and remedies contained in the New York Business Corporation Law or Non-for-Profit Corporation Law and case law applying and interpreting these statutes. New York Condominiums are also governed by the New York Condominium Act, Article 9-B, Real Property Law (the “Condominium Act”).

An annual meeting of shareholders and unit owners (collectively “Owners”) is required by the New York corporation statutes. See CLS Bus Corp Law Sec. 602(b); CLS N-PCL Sec. 603(b). The annual meeting is important to Owners to both elect corporate management and obtain information concerning corporate finances and affairs. However, the rights of unit owners with respect to regular and/or special meetings of the board of directors or board of managers (the “Board) is limited.

In some states the condominium and corporations statutes require regular and/or special board meetings to be open to all unit owners. This does not allow Owners to participate in the discussions or vote but it does allow them to receive first hand information regarding the operations, finances, management and matters which are of concern to the Board. There is no statutory right in New York granted to Owners to attend board meetings in either the Condominium Act or the applicable corporations statutes. The board meetings need not be open unless this requirement is imposed in the Articles of Incorporation or By-laws. Unless otherwise restricted, any action required or permitted to be taken by the Board or any committee thereof may be taken without a meeting if all members of the Board or the committee consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents thereto by the members of the Board or committee shall be filed with the minutes of the proceedings of the Board or committee. See CLS Bus Corp Law Sec. 708(b).

There are certain decisions that require Owner approval such as amendments to the governing documents, election or appointment of officers and removal of a member of the Board for cause. However, the Board is authorized to make day-to-day management decisions that are binding on the corporation without the need to ratify said decisions at an open meeting or without approval from the membership. Such day-to day management decisions include but are not limited to hiring employees, including management companies, bringing litigation on behalf of the corporation, making expenditures for repairs or improvements of common areas, establishing house rules, and fixing monthly maintenance charges as well as special assessments. The Owners have a right to inspect the minutes of the meetings and can therefore obtain information regarding Board’s decisions from a review of same.

Cooperative and Condominium Conversion - A Primer

rhowlett@stark-stark.com (Robyn Nolan Howlett) — Tue, 05 Jul 2005 09:47:13 -0500

Right now in New York and Northern New Jersey, there is a trend of cooperative buildings converting to condominiums. A Cooperative, or co-op is a combination of corporate ownership of shares of stock and a residential leasehold interest in real property. The corporation owns the land and the building which is a residential apartment house. Shares of the corporation's stock are sold in blocks to individuals. Each block of shares is allocated to a particular apartment in the building. By purchasing the block of shares allocated, the owner of the stock becomes entitled to a lease, known as a "proprietary lease", for the apartment to which such shares are allocated.

When a co-op building is converted to condominium ownership, the purchase buys an apartment. At the same time, the purchase, together with the other unit owners, buy an "undivided interest" in the common elements of the building. An owner of a condominium owns the actual unit.

Depending on the area of New York in which the building is located, different laws apply related to the conversion of co-ops and condominiums. Basic provisions include the Martin Act (PDF) which applies to the sale of all types of cooperatively owned real estate including sale of co-op shares, condo units and interests in homeowner associations. The Cooperative and Condo Conversion Act, also part of New York State's General Business law, regulates the conversion of existing rental buildings to cooperative forms of ownership. These laws provide specific protection for tenants living in buildings undergoing conversion, and require that offering plans include explanations of the rights and obligations of purchasers and non-purchases.