Condominium Lenders Standing: Mortgage Liens Versus Condo Board Liens!

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This article, by way of the New York Law Journal, examines the section of real estate law covering condo mortgage loans and the standing of a lenders lien vis-a’-vis certain condo board liens in the event a borrower ceases to pay!

‘Condominium Loans and Lien Priority‘ by Jeffrey B. Steiner and Jason R. Goldstein

Counsel to real estate lenders are frequently tasked with assessing the relative risks of and available mitigants to competing claims on the lender’s collateral. The risk of a municipal tax lien priming the lender’s mortgage or a ground lessor’s remedies threatening the ability of a lender to enforce its mortgage are routinely addressed through tax impounds or mortgagee protective provisions in the ground lease, respectively. If the loan is secured by a condominium unit, the lender must contend with and address appropriately the rights granted to the board of managers under the condominium statute and the specific condominium documents. This article addresses some unique aspects of condominium structures which require closer examination on a case-by-case basis.

Unpaid Common Charges

Among the unique qualities of a condominium structure is the right of the condominium’s board of managers to impose common charges and assessments on the unit owners of such condominium as necessary to finance the costs of upkeep and capital improvements to the condominium building. In the event of a unit owner’s non-payment, the New York Condominium Act provides that each condominium’s board of managers has a statutory lien on each unit within such condominium for the unpaid common charges plus interest thereon.

Generally speaking, the lien for unpaid common charges will be subject to, among other things, all sums unpaid on a first mortgage of record (New York Property Law (RPL) §339-z). However, the condominium declaration of an “exclusive non-residential condominium” may provide that the board’s lien for common charges will be superior to all recorded mortgages. Lenders in a commercial context, then, must ensure that they are protected against a foreclosure by the board of managers on condominium units due to a borrower’s failure to pay common charges if either (i) their mortgage is not a first mortgage or (ii) the condominium is an exclusive non-residential condominium and the declaration provides that the board’s common charges lien is superior to all mortgages, in which event the lender’s lien on its collateral will be extinguished.

Lien Priority

The New York Court of Appeals clarified the lien priority as between a consolidated first and second mortgage and the board’s lien for common charges ( Plotch v. Citibank , 2016 NY Slip Op 3648 (N.Y., 2016)). In this recent case, a lender provided the owner of a condominium unit with a $54,000 first mortgage loan. The following year, the lender provided the owner with a $38,000 second mortgage loan, at which time the lender and the property owner entered into and recorded a consolidation agreement that consolidated both mortgages into a single lien of $92,000. Approximately seven years later, the condominium association filed a common charge lien against the unit for unpaid common charges and subsequently sold the unit in a foreclosure action. The purchaser, who subsequently became the plaintiff in the Plotch case, purchased the unit subject to the “first mortgage” on the unit and sued the lender, seeking a judgment that the $38,000 second mortgage had been subordinate to the lien for common charges and, therefore, extinguished by the foreclosure.

The court held that, because the lien for common charges was recorded after the consolidation agreement and therefore the consolidated lien qualified as a “first mortgage of record” for purposes of RPL §339-z. If, however, the court noted, the lien for common charges had arisen and been recorded prior to the consolidation agreement, each mortgage would have retained its separate-lien status and the $38,000 mortgage would have been extinguished by the foreclosure as a second mortgage subordinate to the board’s lien.

Subordination of its mortgage lien in foreclosure is not the lender’s sole concern following a condominium board’s foreclosure of its common charge lien. For example, a lender may be prevented from enforcing its assignment of leases and rents if its lien is not a first mortgage lien. The First Department Appellate Division considered the assignment of leases enforcement question in Cadlerock Joint Venture v. Board of Managers of the Parkchester South Condominium, (289 A.D.2d 1 (2001)).

At issue in Cadlerock was whether, while its foreclosure action was pending, a mortgage lender could require a tenant leasing the borrower’s condominium unit to pay rent directly to the lender pursuant to the assignment of leases executed by the borrower. The condominium’s board of managers claimed the rents because of its lien for common charges. The court held that, because a first mortgage of record is superior to the board’s lien under RPL §339-z, the lender had a right to collect the rents from the tenant. Accordingly, holders of subordinate mortgages could be prevented by a condominium’s board from receiving any rents collected from a tenant until the board has received all outstanding common charges.

The foregoing cases demonstrate the importance of a lender maintaining a first priority lien on a condominium unit that constitutes its mortgage collateral. If the unit is a residential unit or a commercial unit that constitutes part of a mixed-use residential/commercial condominium and a lender is providing a subordinate mortgage subsequent to the making of a first mortgage, the lender should either (1) consolidate all of the mortgages into one lien (but ensuring, in the first instance, there is no recorded intervening lien for common charges) or (2) cause the borrower to pay off the original loan and make a new first mortgage loan in the combined loan amount.

If the lender’s collateral is part of an exclusive non-residential condominium, the lender must review the condominium declaration to determine if the declarant has taken advantage of the relevant statute which permits the board’s lien for common charges to be superior to all recorded mortgages. In the event the declaration contains such a provision, the lender may, in certain instances (for example, if the borrower owns all units and appoints all board members), persuade the board to subordinate its common charge lien to the mortgage. Failing that, the lender must enter into an agreement with the board pursuant to which the board agrees to provide notice to the lender of any borrower defaults (including the failure to pay common charges) and allow the lender an opportunity to cure such defaults before the board exercises any of its remedies.

Modifying a Loan

Lenders must also be vigilant when modifying a loan on a condominium unit. Certain modifications, such as increasing the interest rate or shortening the maturity date, may cause a loss of lien priority. In such cases, if the lender is not observing all of the formalities in connection with the modification (in particular, obtaining new title insurance), the lender should at least order a title report, updated as of the date of the modification, to confirm no lien for common charges has been recorded against the unit. The lender also should require an estoppel certificate from the board of managers expressly certifying that all common charges for the unit have been paid through the month in which the modification shall occur.

Conclusion

When making loans on a condominium unit, a lender must be mindful of the priority of its mortgage lien vis-à-vis the condominium board’s lien for common charges. By taking appropriate steps in preserving the subordinate status of the board’s lien, or, failing that, causing the board to agree to provide the lender with notice and cure rights in the event of the borrower’s default under the condominium documents, a lender will more effectively safeguard the availability of all remedies against its borrower.