The new foreclosure laws and decisions and how to use them to effectuate foreclosures

1. ADA M LEITM A N BAILEY, P.C.
WE GET R ESULTS
The New Foreclosure Laws
and Decisions and How to Use
Them to Effectuate
Foreclosures

2. Vital Legal Principles in Building Management
By Adam Leitman Bailey, Leni Morrison Cummins, and Dov Treiman*
Foreclosures
Both coops and condos have forms of foreclosures on individual units in the
event of nonpayment of maintenance or common charges. Since in coops, the first
step is Housing Court, the actual process of foreclosure to resell the apartment is
too legally technical to be of particular concern to building managers. However,
while foreclosure is the last step in a coop, it is essentially the first step in a condo.
Remembering that a condo unit is in many respects like a one family home,
condo common charges are in many respects like the mortgage on the one family
home – a second mortgage at any rate. However, unlike a mortgage where the
amount of the loan theoretically goes down over time, common charges generally
continue to accrue. Thus, when a condo owner is in arrears, the attorney for the
Board files a Notice of Lien. That Notice serves to protect the Board both as to the
amounts due at that time and as to the amounts that continue to accrue during the
foreclosure process. Since the Board’s lien is second in priority against any bank
mortgage and since bank mortgages nowadays frequently exceed the value of the
property, the Board has little hope in collecting anything in a foreclosure process
that goes all the way to sale of the unit except the unit itself. Even then, the bank
is more likely to acquire the unit than the Board is, but upon completion of the
foreclosure process, the Board can expect that the new owner of the unit will at
least be paying common charges. The rest of the money the old unit owner owed is
most likely a write off.
So, viscerally, it may seem like it doesn’t pay to foreclose for nonpayment of
common charges. But the Board has no choice. If it makes a policy of not
foreclosing for nonpayment of common charges, there is little motivation for any of
the unit owners to pay their common charges. Foreclosure, expensive and clumsy
as it is, is mandatory for the prudent Board and it will simply have to budget
around this unit.
The prospects aren’t quite so bleak if the unit owner has a tenant. The law
allows the Board to collect the rent directly from the tenant, although methods of
compelling it are expensive and difficult. Frequently, however, collecting the rent
from the tenant puts the unit owner in the position of having no income with which
to pay the mortgage and a settlement of the various parties claims may rapidly
follow.
* Adam Leitman Bailey is the founding partner of Adam Leitman Bailey, P.C.. Mr. Treiman is a
partner and Ms. Cummins is an associate in the firm.

3. BOARD COLLECTS COMMON CHARGES WITHOUT JUDICIAL INTERVENTION BY NOVEL
AGREEMENT AND DEED IN LIEU OF FORECLOSURE
With the recent economic downturn, condominium boards have been plagued by unit owner common charge
defaults. With less unit owners paying their common charges Boards are faced with the prospect of increasing
common charges in order to collect the deficit from those unit owners in good standing -- unless they can collect the
unpaid common charges from the delinquent unit owners.
Most Boards who attempt to collect common charges from delinquent unit owners are faced with essentially three
choices – enter into a payment plan with the defaulting unit owner, sue for money damages, or foreclose. The
problem with the payment plan option is that when a unit owner misses a payment, the Board must start an action,
which takes time and money. This is really just delaying the inevitable. If a Board decides to go straight to court
(small claims or otherwise), the Board may succeed in getting a judgment on the outstanding common charges, but
would have to commence consecutive actions in order to keep collecting the common charges as they continue to
accrue. Also, collection on the judgment(s) may be impossible. This starts a cycle of continuous legal bills and
unpaid common charges. The third option, foreclosure, is the clear choice of these three options because,
theoretically, a Board will be made whole by the sale of the unit. However, especially with the recent regulations
creating more red tape for foreclosure proceedings, this can be a long process.
Our office has created a fourth option, which blends the benefits of the three standard options.
Two years ago, the Board of Managers of a three tower 250 unit condominium retained our firm and advised that a
large percentage of the unit owners were delinquent in common charge payments. The Board further advised that
prior counsel had employed a collection plan involving payment plans and suits for money judgment. Many unit
owners already had numerous judgments against them, but no money had actually been collected.
We realized that we needed a new collection method that would keep us out of court, incentivize unit owners to
make payments, and would rid the condominium of those unit owners who had no way of keeping up with their
common charge obligations going into the future.
The result was an agreement that included a payment plan secured by a deed in lieu of foreclosure (“DILF”). The
DILF is executed simultaneously with the agreement and held in escrow by our firm during the term of the payment
plan. The DILF is released to the Board for recording if a payment is missed and not cured within 10 days. Also
included in the agreement is a Notice to Quit, which, as part of the agreement, is deemed to have been duly and
properly served upon the defaulting unit owner on the 15th
day succeeding the date of the recording of the DILF, and
which further obligates the unit owner to vacate the unit on the 27th
day after recording. Therefore, if a unit owner
defaults on its obligations under the payment plan (and does not timely cure), not only will the Board become the
record owner of the unit, but will gain possession via the Notice to Quit within 27 days thereafter.
Essentially, the agreement tests a delinquent unit owner to determine whether he or she can catch up on their unpaid
common charges under the payment plan and become a unit owner in good standing. If they can – the common
charges are paid in full and the unit owner keeps his or her unit. If the unit owner cannot – the release of the DILF
shortcuts the entire foreclosure process and rids the condominium of a unit owner who cannot keep up with his or
her payment obligations.
The Board was able to collect most of the unpaid common charges without incurring significant legal expense or
spending years in court, and the rate of common charge delinquency has dropped substantially. By utilizing this
method, the Board avoided raising common charges for all unit owners.