Property Grunt

Sunday, November 25, 2007

Lien on me

He’s got your back!

My next series of entries will focus on the areas of foreclosures, liens and the other big bads associated with the imploding real estate market. I am kicking off the series with an interview with real estate lawyer Aaron Shmulewitz.

Mr. Shmulewitz is partner at Belkin Burden Wenig & Goldman. His resume includes representing more than 250 co-op and condo board and his duties include general counsel, building mortgage refinancing and all aspects of corporate representation.

I came across Mr. Shmulewitz when he was featured in the New York Sun article about the rising number of condo fee defaults and he was quite gracious in allowing to be interviewed by me on the subject of condo liens. It is common knowledge in real estate that you need a good lawyer to represent your wants and needs. They can save you a ton of time and money in taking the appropriate measures and avoiding mistakes.

One of the most valuable skills a lawyer can have is to be able to break down legalese into bite size pieces for the layman to consume. You will see that Mr. Shmulewitz clearly demonstrates his mastery of that particular skill set.

Before I begin, Mr. Shmulewitz reminded me that all of his responses are based on New York Law. In other words, unless you are looking for legal information in the area of New York Law, you should seek out legal resources that correlate to the state where your questions originate. In other words, if you have a question about Cincinnati city law, talk to a lawyer who practices in Ohio.

What is the legal definition of a condo lien and what does the process entail in filing a lien? What is the difference between a lien and a lawsuit?

A condo lien is a formal notice filed against a condo unit, creating a public record that a stated sum of money is due to the condominium from this unit; the filed lien prevents the unit from being sold. The lien is recorded by the City Register or county clerk. A lawsuit is a suit filed in court by which the condominium seeks to have the court force the unit owner to pay money to the condominium. A lien can be followed by a lawsuit, or a lawsuit can be filed without a lien having been recorded.

As a lawyer, what are your duties in representing the condo board? What are the challenges in working with the board on a lien?

In general, to do what is necessary to protect the interests of the condominium. If a unit owner owes X dollars to the condominium, the lawyer should make sure that a lien is properly recorded reflecting that debt.

What is the difference between a condo lien and a tax lien that is filed by a town?

A tax lien is superior to a condo's lien. In other words, if a unit is foreclosed upon by the city or a mortgagee, the real estate taxes will always be paid, but the amounts due to the condominium might be wiped out.

The sale of tax liens are a billion dollar a year industry. Can you buy and sell condo liens in New York City?

Theoretically you could, but it's not done.

You stated that in the article that you have seen a 25% rise in defaults. Is this the highest you have ever seen in your experience? Do you think it will get worse?

It's not the highest I've seen--things were much worse in the late 1980's and early 1990's. I think that things will get worse now before they get better. People who get into default situations on their condo mortgages are also likely to default in their condo payments.

In regards to the rising number of defaults, are there any trends to indicate whether these are owner occupied or investor units?

Not that I'm aware of. I would think that the trend would be of owners (regardless of whether they occupy or are investors) who either over-leveraged, or took out adjustable rate mortgages whose rates are now being reset for the first time.

If an owner is defaulting on condo fees, there is a strong possibility that they are unable to afford the mortgage payments. What happens when the bank and the condo are both foreclosing on the property? Who is the first in line to get paid? Which party has more leverage?

Under New York law, a first mortgage takes priority over a condo lien. Should a first mortgagee foreclose on its mortgage, it wipes out the condo lien unless the foreclosure sale yields a sale price higher than the amount due to the bank. A second mortgage is subordinate to a condo lien.

Once the foreclosure goes through, does the condo board hire a broker to sell the property? What are their options in liquidation?

Should a condo wish to foreclose on a lien, what usually happens is a public foreclosure sale which is attended by multiple bidders. It is very likely that one of the bidders will be the successful bidder--the condo board almost never becomes the owner of the unit.

In the article it is stated that liens are usually settled out of court but that is now becoming progressively difficult. Why is that?

I think because people who are defaulting to their condos are also defaulting to their mortgagees--they are simply walking away from their obligations.

What do you recommend condo board do to protect themselves from condo fee defaults?

Since condos generally do not have a right of approval/disapproval of prospective purchasers (but only have a right of first refusal), condos generally find it hard to screen out potential payment problem purchasers (unlike co-ops). Some condos nevertheless require some sort of escrow from an incoming purchaser (like twelve months of common charges) to act as a "security deposit" should the purchaser ever go into default. However, should the matter ever be litigated, I think that it is unlikely that a court would uphold the right of a condo to require that, unless the condo's bylaws authorize it. Since there is relatively little that a condo can do to screen out or prevent potential payment problem purchasers, the only thing that a condo can really do once a default occurs is to act as quickly and aggressively as possible. Do not delay.

Are they (the board) allowed to discuss the matter in public?

Yes, it's a public document.

What should a condo board look for in a lawyer?

Experience, responsiveness, practicality.

What is your craziest story in filing a lien?

Don't really have one; sorry.

Once again, I would like to thank Mr. Shmulewitz for doing this interview. Those of you who have more questions for him or seeking legal counsel please go to his firm’s website.