Condominium boards and managers are often frustrated by unpaid HOA fees, monthly maintenance fees, special assessments, and other condo fees. Once a unit owner falls more than sixty days behind in his or her common charge payments, it is recommended that this problem be turned over to the condominium association’s attorneys to resolve.
A variety of legal methods can be used by a condominium association’s attorneys to attempt to collect common charge arrears. Which method or combination of methods will be best for a particular situation will vary.
Regardless of which method or methods are used, the first step in the process is sending a Thirty Day Notice of Debt Collection to the unit owner. One benefit of sending a Notice of Debt Collection prepared by an attorney is that it conveys the seriousness of the common charge arrears to the unit owner. In addition, it provides the unit owner with an opportunity to examine the breakdown of the amount he or she owes, including due HOA fees, monthly maintenance fees, special assessments, late fees, and other condo fees. This may expedite an amicable resolution to the matter, as sometimes owners do not read their monthly maintenance fee statements and do not realize they are in arrears. It may also motivate an owner to make an inquiry regarding a particular charge her or she wanted answered before paying it.
In the event payment is not made within the thirty day period provided under the Notice of Debt Collection, the next step is filing a common charge lien against the unit pursuant to NY Real Property Law Section 339-aa. Common charge liens are security interests similar to mortgages. Like a mortgage, a common charge lien is filed in the property records of the Office of the County Clerk where the unit is located. A properly filed lien provides notice to the world that the common charges are owed and in most cases will prevent the sale or refinance of a unit until the HOA fees, monthly maintenance fees, special assessments, late fees, and other condo fees owed by the unit owner are paid. In addition, a common charge lien can be foreclosed like a mortgage. That is, a condominium association can start a foreclosure action that will result in an auction sale of the unit with the auction proceeds being used to pay off the common charge arrears.
Unfortunately, common charge lien foreclosure actions can drag on for several years, and the condominium’s lien will be subordinate to any mortgages filed before it. This puts condominium associations in New York at a great disadvantage compared to other states where a certain period of monthly maintenance fees (e.g., six month’s worth) will take priority over mortgages on the unit. Therefore, attorneys representing condominium associations in NY should ascertain whether there are mortgages of mortgage defaults against the unit and the value of the unit and then consult with their clients in order to determine whether a lien foreclosure action makes sense before proceeding.
Even if the condominium association’s attorneys evaluate the situation with their client and conclude that a lien foreclosure does not make sense, they should still file a common charge lien against the unit. As well as making the unit unsellable, filing the lien will make the condominium association a "secured creditor" under Federal Bankruptcy law. Having the status of secured creditor will generally allow for the recovery of amounts due at the time. This will ultimately result in a higher percentage of the common charges being repaid to the condominium association if the unit owner files for bankruptcy protection.
For the past few years, rather than going the foreclosure route, I have generally recommended that common interest community associations sue unit owners in arrears in Civil Court for money judgments. This is much faster and less expensive and can still result in an auction sale of the unit. It also provides the condominium association with access to other assets such as bank accounts and wages to satisfy the common charges arrears once a judgment is entered.
Taking this a step further, I have recently begun recommending that lawsuits for money judgments be filed with the Small Claims Part of the Civil Court. While the amount of the recovery is limited by the $5,000.00 jurisdictional limit of the Small Claims Part, it is much quicker and less expensive than regular Civil Court. Rather than litigating for months or years, your attorney can spend a few hours in court at a hearing where a repayment agreement with the delinquent unit owner can often be negotiated. If negotiations with the unit owner fail, your attorney can present your case to an arbitrator who renders a binding decision (and judgment if you prevail), which your attorney will receive in the mail within a few days of the hearing date–quick justice indeed!
Lastly, a little known, but attractive, method to collect HOA fees, monthly maintenance fees, special assessments, late fees, and other condo fees is available where a unit owner rents his or her unit to a tenant. Real Property Law Section 339-kk authorizes condominium associations to collect rent payments directly from the tenants of unit owners in arrears. This is accomplished by sending a notice to the tenants pursuant to the statute. Since a tenant’s monthly rent for a unit is usually several times the amount of the common charges for the same unit, if the tenant obeys the notice the arrears are usually paid off within two or three months. Unfortunately, the statute does not provide the condominium association with any legal remedy against the tenant if he or she disregards the notice. This flaw in the statute can be remedied by putting language in a condominium association’s lease application, which authorizes the condominium association to sue a unit owner’s tenant directly.
It is evident that Real Property Law Section 339-kk, which authorizes condominium associations to collect rent payments directly from the tenants of unit owners, and Real Property Law Section 339-aa, which authorizes lien foreclosures, both need to be amended by the legislature in order to give them more teeth. As written, these statutes require creative lawyering to get results, which leaves many condominium associations operating under tight budgets with chronic arrears problems. A few minor revisions to these statutes would dramatically increase their effectiveness, and I hope to petition the NY State Legislature to effectuate these changes in the not so distant future.