Legal Responses to Defaults by New York Cooperative and Condominium Unit Owners- Part II

Our readers should be aware that if the default remains uncured and an auction is necessary, that the distinction between cooperatives and condominiums becomes pronounced. The auction procedure in a cooperative is non-judicial, meaning that it does not require the intervention of a Court, unless a party specifically requests judicial intervention. After a lien is filed against a defaulting condominium owner, all proceedings, including the foreclosure proceeding and the oversight of the auction process, require the intervention of a Judge and take place in a Court.

Cooperative clients should understand what is accomplished once the Proprietary Lease is terminated. In order for the cooperative or another party to obtain legal ownership of the cooperative, the legal auction procedure is then commenced. A Notice of Auction is placed in a newspaper of general circulation and delivered to the unit owner in a legally compliant manner. At the auction, the Terms of Sale and a Memorandum of Sale as prepared by our firm are presented and read aloud by the auctioneer. The successful bidder will obtain the transfer of the apartment in the time frame provided by the Terms of Sale.

While the auction process allows for the obtaining of legal ownership, a Landlord-Tenant procedure is then required to obtain physical ownership of the unit. This proceeding is even required if the unit owner does not leave the unit during the default response procedure. Once the auction notice is advertised in the newspaper, it is not uncommon for our attorneys to entertain telephone calls where a person states incredulously that they can get the apartment for “only $18,000.00” (the amount that may be owed for maintenance). We will remind the caller that there are no warranties as to the status of occupancy or unit condition. The “successful” auction bidder may merely be buying what may be a protracted landlord-tenant case.

Since a condominium is real property, responses to defaults take a different course. While the initial fact gathering and warning letter process remains similar as in cooperatives, in a condominium facing a monetary default, the Board of Managers should file a lien which will notify those who may wish to purchase the unit or issue a loan to the unit owner that an outstanding monetary obligation exists to the building. Eventually the unit owner will need to become current to complete his or her intended transaction. The next step is to commence a foreclosure proceeding of the lien that was filed. Said foreclosure proceeding is not unlike those commenced by unpaid mortgage lenders. They are judicial, time consuming and expensive. Following the issuance of the judgment of foreclosure by a Court, the condominium could become the successful bidder at the auction and obtain the transfer of title documents.

In our experience, it is a rare occurrence that the unit owner allows the matter to proceed through the auction stage. Usually the unit owner will seek a restraining order in the state Court of the proper county allowing the cure of the default or objecting to its characterization. Unit owners have also been known to make bankruptcy filings that result in the stalling of the building’s response to the default . In addition, if the default is monetary in nature and there is a loan on a cooperative unit, the lender will pay the outstanding balance due in order to preserve its security interest. The reader should be aware that in a cooperative, maintenance obligations take priority over a unit owner’s share loan, so that a lender is likely to cure a monetary default in a cooperative. The priority of obligations is different in a condominium, in that mortgage obligations take precedence over common charge payments. We are available to assist our readers whether they may be prosecuting or defending a default in a cooperative or condominium building.