New York’s condominiums struggle with the economy and real estate market when faced with abandoned units. Almost invariably, an owner delinquent in payment of common charges was in default on his mortgage. Owner delinquencies are often only temporary drags on the condos in which they were situated. At some point, the relevant lender would commence and complete (i.e., sheriff’s sale) a foreclosure. The lender would become the owner and pay common charges from that point forward as required by New York’s Condominium Act. It no longer seems to work this way.

Instead, many lenders do not even initiate the foreclosure process. If they do, they never complete it for a variety of reasons. No managing agent or firm is unfamiliar with the ‘never-ending’ lender foreclosure. Experts expect this will only worsen. Lenders now face additional requirements and conditions with respect to their foreclosures. About a year ago, New York’s judiciary instituted extensive requirements on residential foreclosures. Condos must now develop strategies to minimize the negative financial, physical, and psychological impact of abandoned units.

Rent Receivers and Lender Foreclosures

An abandoned unit can generate funds for a condominium from a source other than the owner or relevant lender. That unit can be the subject of a rent receivership whereby it is rented to a tenant. The resulting rent is utilized to pay ongoing common charges and pay down the common charge arrears. New York City continues to see strong demand for affordable rental housing. NYU’s Furman Center advises that ¾ of all NYC housing stock consists of rental units. NYC’s Comptroller reported the rental vacancy rate in 2005 was 3.09% and 2.88% in 2008. Apartments renting for less than $1,000 per month have grown scarce, while apartments that rent for more than $1,000 have grown. Because of increasing demand for available units, the ‘never-ending’ lender foreclosure may present an opportunity.

A condominium can create a receivership via a lender’s existing foreclosure. New York law provides that upon “motion of a person having an apparent interest in property which is the subject of an action in the supreme or a county court, a temporary receiver of the property may be appointed, before or after service of summons and at any time prior to judgment, or during the pendency of an appeal, where there is danger that the property will be removed from the state, or lost, materially injured or destroyed. A motion made by a person not already a party to the action constitutes an appearance in the action and the person shall be joined as a party.” A person who “establishes an apparent right to, or interest in,” property that is the subject of a foreclosure and at risk for loss may apply for the appointment of a receiver. A condominium’s filed lien constitutes a right to or interest in property. A condominium’s inability to recover unpaid common charges via the lenders sheriff’s vis a vis a unit with no equity works in favor of securing the receivership, without which the unit may deteriorate or be at risk. Abandoned units in foreclosure decline in value because they render the condominium cash-poor, leaving the condominium unable to maintain, repair, or replace the common elements appurtenant to or surrounding the unit. The diligence, or lack thereof, of the lender in prosecuting its foreclosure is a factor in a condominium’s right to a receiver.

Renting the Abandoned Unit by the Condominium Via Owner Consent

The Act provides that no “unit owner may exempt himself from liability for his common charges by waiver of the use or enjoyment of any of the common elements or by abandonment of his unit.” A unit with mortgage in excess of the unit’s value and ever-increasing common charges is often a burden to an owner. Owners believe that by abandoning a unit in foreclosure, they free themselves of any obligation to pay common charges.

Yet, until the lender completes its foreclosure, the owner is obligated to pay common charges. Even after a Chapter 7 bankruptcy, an owner must pay charges accruing after that petition filing date so long as he holds the unit’s legal title. Congress in 2005 widened the scope of ‘non-dischargeable’ obligations. A Chapter 7 bankruptcy “does not discharge an individual debtor from any debt” connected with a “debtor’s interest in a [condominium] unit” so long as the debtor has “a legal, equitable or possessory interest in the unit.” A condominium should pursue abandoned unit owners to make contact, and propose an arrangement whereby both the condominium and the owner receive what it wants. In exchange for the owner’s transfer of all possessory or occupancy rights to the condominium, such that the condominium can rent the unit so long as the owner retains ownership, the condominium will forever free the owner of all obligation despite continued ownership. The condominium then rents the unit, and generates income to pay the common charges and arrears.

Lender Obligations Vis a Vis Empty Units in Foreclosure

On April 14, 2010, RPAPL 1307 (Duty to Maintain Foreclosed Property) became effective. It provides that “a plaintiff in a mortgage foreclosure action who obtains a judgment of foreclosure. . . shall maintain such property until such time as ownership has been transferred through the closing of title in foreclosure, or other disposition, and the deed for such property has been recorded.” It applies to residential property that is vacant, becomes vacant, or is abandoned by the mortgagor but is occupied by a tenant and the plaintiff’s maintenance obligation is suspended during bankruptcy or receivership. It also creates a new cause of action to be maintained by the government, any tenant lawfully in possession, or a condominium to recover the cost of maintenance. A condominium must give the lender at least seven days’ notice and has a cause of action against the lender for the recovery of the costs incurred for repairs. The law defines “maintain” and categorizes various maintenance efforts.

While abandoned units present challenges to condominiums, those challenges can be met. Condominiums have rights, strategies, and options when faced with abandoned units.