COVID-19 has provided many challenges for cooperatives and condominiums. Financial distress of unit owners/proprietary lessees is one of those challenges. Some unit owners/proprietary lessees are not paying maintenance or special assessments or both.
Foreclosure could be blocked by the unit owner/proprietary lessee filing a hardship affidavit. In some cases, the unit owner/proprietary lessee could also apply for a grant from the funds made available by federal COVID-19 relief programs, which, among other things, funded the New York State Emergency Rental Assistance Program. These programs were generally limited to low-income households.
Some boards and managing agents are torn over how to proceed in face of the foreclosure moratorium, authorized under the COVID-19 Emergency Eviction and Foreclosure Act of 2020, which was extended to January 15, 2022. As the moratorium ends, boards need to revisit these issues.
Prior to COVID-19, boards with unit owners or proprietary leaseholders in default had two options: foreclosure or money judgments. During the moratorium, absent certain conditions, money judgments were the best option. To the extent the courts were open and conducting business, motions for summary judgment could be heard and decided. Moreover, the money judgment could function as a full or collateral estoppel for a judgment for eviction.
There were limited exceptions to the moratorium: 1) the defaulting tenant or unit owner was not suffering a COVID-19 hardship or 2) the defaulting tenant or unit owner was willfully damaging the premises.
Taking a moment to consider these exceptions, what proof is required to establish the exceptions? The willful damage exception requires a physical inspection of the unit or apartment. Generally, right is available under the condominium documents or the cooperative proprietary lease. The damage must be identified and investigated, and the loss needs to be quantified. Courts may order access to units for this purpose. However, boards must take care not to harass unit owner/tenants; there must be a good-faith basis for seeking an inspection.
The lack of a COVID-19 hardship will require more prolonged financial investigation. The starting point must be the hardship affidavit and the defaulting party’s original purchase application. If this investigation takes place in the action on the unpaid maintenance, then there should be discovery of tax returns, wage stubs and other financial records. In all likelihood, the board will require an accountant to assist in this process.
At press time, the latest moratorium appeared set to expire on January 15, 2022. Assuming it did expire, condominiums and cooperatives holding judgments for unpaid maintenance or rent should be able to take those judgments and move for eviction. Those who have not started the process should press ahead for both a money judgment and eviction. Even if the moratorium is extended, boards should seek money judgments.
If the unit owner/proprietary lessee is in default on maintenance, they are likely also in default on any underlying mortgage or loan. The lenders/banks have certain priority over boards in cases of default. Maintenance liens on units or leases may be cut off by a foreclosure on the loan. The buyer of the foreclosed unit or shares takes them, clear of the debts of the prior owner. So, in many cases, a money judgment is the only option for recovery for boards. That may continue to be the case for some time to come.
The New York state courts were essentially shut down for months in 2020. The efforts to restart court proceedings have been steady but slow. Cases are being handled remotely. Jury trials are being adversely impacted by COVID-19, so certain cases are not moving rapidly. The current backlog is not resolving. The courts are handling motions and discovery, but trials are slow to move ahead. Once the moratorium ends, the courts will have to re-engage on thousands of cases. This will take months to get the cases moving in terms of motions and discovery, taking years to clear the backlog. Trials will take longer. Therefore, pursuing a money judgment may be the best option for the boards until the court delays begin to resolve, which is likely to take many years. Pursuing the money judgment may the best option for recovery based on the delays in the courts and the superior rights of the lenders to cut off the board liens in units for unpaid maintenance.
This column does not provide legal advice, only general discussion. For specific legal advice, please consult an attorney.
Carol A. Sigmond
Greenspoon Marder LLP
590 Madison Ave., Suite 1800
New York, NY 10022
carol.sigmond@gmlaw.com
(212) 524-5074
