As many of you might know, a New York State law went into effect on December 20, 2016, to provide relief to Communities, Condominiums and Homeowner Associations plagued by abandoned properties.
The law was designed to hasten the time to move foreclosed homes from judgment of foreclosure to sale because borrowers often vacate their homes, leaving properties to deteriorate. The legislation that was passed to help condominium boards, homeowners associations and their attorneys deal with the issues surrounding these vacant and abandoned properties (also referred to as “zombie properties”) are Sections 1308, 1309 & 1310 of the NYS Real Property Actions and Proceedings Law.
RPAPL § 1308 created a post-foreclosure timeline for returning vacant and abandoned properties back to the market. Section 1308 of the Real Property Actions and Proceedings law imposed a duty to inspect, secure, and maintain abandoned properties on the mortgagee (the mortgage creditor) or their servicing agents. Within 90 days of the date on which the loan for the property becomes delinquent, the mortgagee, or its agent, must complete an exterior inspection of the subject property to determine occupancy. Afterwards, follow-up inspections must be conducted every 25-35 days. If at any time the mortgagee or its agent determine that the property is vacant and abandoned, as defined in RPAPL § 1309(c), then it must, within seven business days of the determination, post notice on an easily accessible part of the property that would be reasonably visible to the borrower, property owner or occupant, and monitor the property for any change in occupancy and to ensure that the notice maintains posted. If the posted notice is not responded to or persists for 7 consecutive days, the mortgagee or its servicing agent must secure the property.
Subsection 4 of RPAPL § 1308 defines certain measures the mortgagee or its agents must take in order to secure the property. In addition to posting notice on the property, the mortgagee or servicing agent must assume maintenance obligations for the property and provide pertinent information regarding the property to the Department of Financial Services for inclusion in the Department’s established vacant and abandoned property registry established under RPAPL Section 1310.
After the 2016 law went into effect, I reached out to Assemblyman Zebrowski, the Chair of the Assembly Banking Committee. I also reached out to the Department of Financial services. In my discussions with both, I made it clear to their offices that corrective legislation was needed to provide for additional protection to Condominiums and Homeowners Association. As we all have experienced, mortgage foreclosures can last for years. While a lender’s foreclosure action is pending, homeowner association fees and common charge arrears continue to mount as these actions plod along. The lenders, in most instances, pay the real estate taxes on the premises during the pending foreclosure, but not the homeowner association fees and common charges.
After a conference call with Assemblyman Zebrowski and with legal counsel for the Division of Financial Services (“DFS”) for New York State in September of 2017, I set up a meeting with the members of the Rockland County Bar Association Co-op and Condominium Committee to come up with some needed changes to the new legislation. The committee recommended that at the very least, Real Property Actions and Proceedings Law, Section 1308, Subdivision 4, should be amended by adding a new subparagraph to require the first mortgage lienholder to pay common charges and homeowner association fees for vacant and abandoned units, as defined in the statute, during the pendency of the foreclosure action. The services that are provided by the condominiums and homeowners associations are essential services, i.e., landscaping, snow removal, outdoor lighting, insurance, etc., which benefit not only the unit owners but the first lienholder as well. Subdivision 4, subparagraph (f) of Section 1308 required the first lienholder to pay the utilities for the unit if the posted notice is not responded to or persists for seven consecutive calendar days without contact with the borrower, property owner or occupant indicating that the property is not vacant or abandoned. Therefore, since the statute already contemplated that this is not a situation where there is someone living in the property, or likely to contest the foreclosure action, it seemed logical to ask that the statute be amended so that the first lienholder also be responsible for the homeowner association fees and common charges.
I told the Assemblyman and DFS that our committee recommended that the first lienholder’s obligation to pay any common charges or homeowner association fees should commence once the first lienholder files a foreclosure action on the ground that the subject property is vacant and abandoned. The obligation would cease once the judgment of foreclosure and sale has been signed by the court because recent amendments to the New York State statutory law already provides for a mandatory timeframe in which the first lienholder must hold the auction sale once the judgment of foreclosure and sale has been signed. That statute is RPAPL, Section 1351, subdivision 1 which states that the judgment must direct that the mortgage premises be sold by or under the direction of the sheriff of the county or referee within 90 days of the judgment of foreclosure and sale.
If the first lienholder does not wish to take advantage of the foreclosure proceeding for one reason or another, then of course the condominium or homeowners’ association can bring on a foreclosure action to foreclose their lien for unpaid common charges or homeowner association fees. The problem arises when the first lienholder’s lien, which the condominiums and homeowner associations take subject to, exceeds the value of the real property. There is no incentive for the condominium or homeowners’ association to pay thousands of dollars in legal fees and disbursements to commence an action to foreclose their lien since the first lienholder’s lien has priority over the lien for common charges and homeowner association fees. Therefore, in almost every situation that exists in the foreclosure process involving the condominium or homeowners association where a unit owner has vacated and/or abandoned his/her property, the condominium/homeowners association is reluctant to bring on a foreclosure action if there is a pending first lienholder’s foreclosure action and/or there is no equity in the property.
Finally, I discussed with the DFS the need to address changes to the existing law as it relates to the criteria used to determine whether a property is vacant or abandoned when it is part of a multifamily dwelling.
I am happy to report that the Governor recently signed into law an amendment to RPAPL § 1308(4) by adding a new subdivision (k) to require holders of first mortgages on vacant and abandoned residential properties to continue to pay “homeowners’ association and cooperative fees” during the pendency of a foreclosure. There are however problems with the new legislation. (I pointed out these deficiencies to the Assemblyman’s office after they sent me the legislation).
The first concern is that the language contained in paragraph (k) states that the servicer shall pay “homeowners’ association or cooperative fees as needed to maintain the property”. This sentence has two problems. First, it should state “homeowners’ association or common charge fees or assessments”. Cooperatives, unlike a Condominium and a Homeowners’ Association, can foreclose their lien and cut off the lien of the first mortgagee. In New York State, a cooperative corporation generally has lien priority over a lender’s security agreement. This is not the case with homeowners’ associations and condominiums.
The second problem is the language in the amendment, “as needed to maintain the property”. The servicer of the mortgage may be able to argue that they don't have to pay the homeowners’ association or common charge fees because it's not needed to maintain the property. If the property that is needed to be maintained is the common elements/common areas, the first lienholder may argue that the Homeowners’ Association or Condominium does not need the fees or assessments to be paid by the first mortgagee in order to "maintain the property". This gives the servicer a lot of wiggle room. The lender will parse the fees and say certain items do not apply to maintain the property.
Finally, the 2016 legislation only applies when the unit is vacant and/or abandoned. While this may be better than nothing, the questions may arise like: “but what is vacant? What if the owner is in jail? Or left stuff there? Or claims to return occasionally, if not to sleep, then to move stuff in and out and/or do drugs?”The new legislation, effective August 14, 2019, is a good start, but we need to first correct the inaccuracies in the recent amendment and lobby for clarifying legislation in order to better protect our condominium and homeowners’ association clients from potential financial ruin.