Collecting Unpaid Maintenance From a Co-op Shareholder

The Collection Sequence

Most proprietary leases follow the same structure. The specific notice periods, service methods and cure rights come from your lease, not from a statute, so the document controls and has to be read before anything is sent.

• Demand and the notice to cure

  The process begins with a written notice giving the shareholder a fixed period to cure the default by paying what is owed. The lease dictates how long that period is, how the notice must be served, and where it must be sent. A notice served the wrong way or sent to the wrong address is not saved by the shareholder actually receiving it, and defective notices are the single most common reason these cases fail.

• Notice of termination

  If the default is not cured, the board terminates the proprietary lease, usually by resolution, followed by a notice of termination stating the date the lease ends. The board action matters: a termination that was never properly authorized by the board is vulnerable, and the shareholder's lawyer will look for it.

• Holdover proceeding

  Once the lease has been terminated, the shareholder is in possession without a lease and the corporation brings a holdover proceeding in Housing Court to recover the apartment. This is where the predicate notices get tested. If they survive, the building is in a strong position.

• Sale of the shares

  With the lease terminated, the corporation can sell the shares and lease under Article 9 of the Uniform Commercial Code, applying the proceeds to the arrears, fees and costs, with any surplus going to the former shareholder and other lienholders in order. The sale has its own notice and commercial reasonableness requirements, and a sale conducted carelessly can be unwound.

Do Not Overlook the Shareholder's Lender

This is the part managing agents most often miss, and it is frequently the fastest route to being paid in full.

• The recognition agreement

  Where a shareholder financed the purchase, there is almost always a recognition agreement among the shareholder, the lender and the corporation. It typically obligates the co-op to notify the lender of a default before terminating the lease, and it gives the lender the right to cure.

• Why the lender usually pays

  The lender's entire collateral is the shares and the lease. If the co-op terminates, that collateral can be wiped out. A lender facing that outcome will very often pay the arrears itself rather than lose its security, which resolves the building's problem without a proceeding at all.

• Why skipping the notice is dangerous

  Failing to give the notice the recognition agreement requires does more than forfeit that opportunity — it can expose the corporation to a claim by the lender whose collateral was extinguished without the chance to protect it. The recognition agreement should be pulled at the start of every file, not after the termination notice has gone out.

Mistakes That Cost Buildings the Case

• Accepting money after termination

  Once the lease has been terminated, accepting a payment can be argued to have reinstated it. Partial payments that the managing office applies automatically, or a check deposited by a bookkeeper who was never told the status of the file, can undo months of work. Files in termination need to be flagged in the accounting system, not just in the lawyer's folder.

• Inconsistent ledgers

  The amount demanded has to match the ledger, and the ledger has to be defensible line by line. Late fees, legal fees and assessments have to be authorized by the lease or by a properly adopted resolution. A ledger padded with charges the building cannot support undermines the credibility of the whole claim.

• Missing the bankruptcy stay

  A shareholder who files for bankruptcy triggers an automatic stay, and steps taken in violation of it can be voided and sanctioned. Proceedings should stop the moment a filing is known, and resuming requires relief from the bankruptcy court.

• Suing the wrong person

  If the shareholder has died, the proceeding has to be brought against a court-appointed fiduciary, which often means the building has to get one appointed first. That situation is covered on our page on unpaid maintenance after the owner's death. If someone other than the shareholder is in the apartment, that occupant generally has to be named as well.

Money Judgment or Possession

Terminating the lease is not always the right move, and the choice should be made deliberately at the outset.

• A shareholder with substantial equity and a temporary problem will usually cure — the notice alone does the work
• A shareholder with a mortgage close to the apartment's value leaves little surplus, and the lender becomes the party to deal with
• A collectible shareholder who simply will not pay may be better pursued on a money judgment, with wage and account enforcement
• Most proprietary leases shift legal fees to the defaulting shareholder, which changes the economics of pursuing even a modest balance
• A payment agreement, properly documented and with the termination preserved if it is breached, resolves most files without a trial

Speak With Our Firm

• Collection work that holds up

  Maintenance collection is routine until it is contested, and then it turns entirely on documents prepared months earlier — the notices, the board resolution, the ledger and the recognition agreement. We handle these files for cooperative corporations and managing agents so that the paperwork is right the first time.

  Call 212-233-1233 or email [email protected]. For condominium buildings, see collecting unpaid common charges.