Gallet Dreyer & Berkey, LLP | Defaulting Condominium Sponsor or Commercial Unit Owner - Receivership may Be the Answer
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Defaulting Condominium Sponsor or Commercial Unit Owner - Receivership may Be the Answer

04/09/2012 | Spring 2012 Newsletter
As one of the consequences of the economic downturn, our firm is regularly consulted by Boards of Managers for advice regarding sponsors and/or commercial unit owners who have paid no common charges for several months and in some instances, several years.

What actions should the board take
In general, we recommend that our clients file a lien for unpaid common charges on behalf of the condominium in the County Clerk’s Office (“Condominium Lien”). The Condominium Lien is inexpensive to prepare and file, continues in effect until all sums are paid or until the expiration of six (6) years from the date of filing, and has priority of payment over all other liens except the unpaid portion of a first mortgage and for unpaid taxes on the unit.

How is the condominium benefited by filing the lien
Section 339aa of the Condominium Act (“Act”) provides that the Condominium Lien may be foreclosed on the defaulting unit by the Board of Managers commencing an action in the New York State Supreme Court in the County in which the unit is located. The Act provides that the defaulting unit owner must pay a reasonable rent for the unit for any period prior to sale pursuant to a judgment of foreclosure and sale if so provided in the By-Laws. The Condominium is entitled to the appointment of a Receiver to collect the reasonable rent.

What is a receiver
A Receiver is a person who receives his or her appointment, duties, power and compensation directly from the Court. In the context of this discussion, a Receiver is typically directed to collect reasonable rent from the defaulting owner who is in occupancy or to lease the unit and collect the rent if vacant. In the case of a commercial unit (such as a garage) the Receiver may be empowered by the Court to manage the operations and collect all income.

How does the appointment of a receiver benefit the condominium
In a recent case handled by our office entitled “Board of Managers of Boulevard Towers Condominium v. Ezra Academy of Queens”, the Supreme Court of Queens County granted our motion on behalf of the Condominium for the appointment of a Receiver empowering him to collect tuition payments from students attending Ezra Academy (The Condominium Owner), rental payments from Ezra Academy’s commercial tenant, and reasonable rent from Ezra Academy. The Court directed that the money so collected be used by the Receiver to pay current common charges and assessments, real estate taxes, and “any other expenditure as necessary to preserve and maintain the premises during the pendency of the Receivership.” Once in place a receivership is designed to maintain the unit and to pay the Board the current common charges, assessments, water and sewer costs pending the judicial foreclosure of the Condominium Lien and sale of the unit at auction.

Practice Hint
The Receiver may only be authorized to pay the Board the common charges and assessments which accrue during the receivership. Arrears may only be paid from the monies collected from the judicial sale of the unit(s).

Where appropriate, we generally recommend filing the motion for a Receiver as soon as practicable and to proceed by Order to Show Cause.

If the condominium is named as a defendant in a mortgage foreclosure action
A sponsor or a commercial unit owner who has defaulted in the payment of its common charges may be, and often is, equally deficient in meeting its mortgage commitment.

Traditionally, a Condominium has been at a distinct disadvantage in such a situation. The law is clear that the unpaid balance of a first mortgage lien is superior to a lien for unpaid common charges. Consequently, recovery of the Condominium’s arrears, including the common charges and assessments incurred during the period pending the foreclosure and sale of the unit, could only be collected from surplus monies after the full satisfaction of the mortgage. The mortgagee bank would sometimes seek the appointment of a Receiver. Any monies collected by the Receiver appointed in a mortgage foreclosure action would be used to pay down the arrears of the mortgage pending the sale of the unit at auction.

In some more recent cases, the courts have recognized that the primary duty of a Receiver in a foreclosure action is to preserve the property pending judicial sale. Applying this understanding, the courts have ruled that the Receiver should pay the current common charges, taxes, insurance, water and sewage, as well as other expenses to maintain the property, before applying any money to the reduction of the first mortgage.

For example, in the Boulevard Towers action, the mortgagee Bank sought to require that any monies collected be placed in escrow pending the foreclosure and sale of the commercial unit.

The Court denied the mortgagee bank’s attempt to prevent the Receiver from using monies collected to preserve and maintain the property.

Practice Hint
We generally recommend to the Board of Managers in a mortgage foreclosure that it take full advantage of the judicial priority given to the payment of common charges during a receivership by seeking the appointment of a Receiver by Order to Show Cause. Again, time is of the essence since the Receiver may only pay common charges during the receivership.

In recent years the courts have granted more authority to receivers. They are often empowered to generate income from the collection of rent from occupied units and to lease those which have been vacated and to prioritize the payment of current common charges. This trend shows that the courts recognize the financial problems caused to the other owners of residential units when a sponsor owning multiple units and/or a commercial unit owner defaults. A receivership provides the Board of Managers with an alternative to raising common charges and/or imposing a special assessment on unit owners who are meeting their obligations to the condominium. This relief, however, is only available once the receivership has been ordered by the court, so it rests with the Board of Managers to proceed as expeditiously as possible.