Nonjudicial Foreclosure: A Cure Worse Than the Disease for Co-op Boards
Nonjudicial foreclosure is not the answer. It is legally untenable and could subject co-op boards who employ that method to severe legal and financial consequences.
March 10, 2020 at 11:00 AM
5 minute read
The enactment of the Housing Stability and Tenant Protection Act of 2019 (HSTPA) has created considerable turmoil and uncertainty in the real-estate industry in New York. Although perhaps not intended to be impacted by this sweeping legislation, co-ops are undeniably bound by its provisions, and are legally prohibited from collecting "additional rent" charges—such as late fees, attorney fees, sublet fees, and the like—in summary nonpayment proceedings in Housing Court.
To address those recent developments, some practitioners have recommended alternative methods for collecting maintenance arrears charges from cooperative shareholders through the use of UCC Article 9 nonjudicial foreclosures, at least with respect to owner-occupied units. See, e.g., "A Tool for Co-op Boards to Collect Arrears and Legal Fees." Habitat, Jan. 28, 2020. But nonjudicial foreclosure is not the answer. It is legally untenable and could subject co-op boards who employ that method to severe legal and financial consequences.
There is already binding, appellate case law that holds that a co-op cannot terminate a lease based on nonpayment of rent, because it frustrates the shareholder's ability to interpose a warranty of habitability defense. This deprivation of rights, the courts have held, is against public policy. See, e.g., 205 West End Avenue Owners v. Adler, 1990 N.Y. Misc. LEXIS 786 (App. Tm., 1st Dept. 1990); Windy Acres Farm v. Penepent, 40 Misc.3d 63 (App. Tm., 2d Dept. 2013).
Similarly, Real Property Law (RPL) §235-b (the Warranty of Habitability Statute), expressly states "[a]ny agreement by a lessee or tenant of a dwelling waiving or modifying his rights as set forth in this section shall be void as contrary to public policy." RPL §235-b[2].
Since a lease provision that authorizes a co-op to perform a nonjudicial foreclosure based on nonpayment of maintenance denies a shareholder a forum for asserting a warranty of habitability defense, the public policy considerations flagged by existing precedent are clearly implicated here. Thus, any provision in a co-op's governing documents that permits the cooperator's stock and lease to be terminated for nonpayment of maintenance may be determined to be unenforceable as a matter of law. That is not to say, however, that such action cannot be taken after a lawful eviction has occurred.
Moreover, appellate courts have applied these identical principles and found that the prosecution of UCC-9 nonjudicial foreclosures against cooperative shareholders who actually reside in their co-op apartments is legally impermissible. See Ryfun v. 406 W. 46th St., 297 A.D.2d 202 (1st Dept. 2002) (nonjudicial foreclosure of cooperative shares failed to comport with the shareholder's rights under RPL §235-b and post-judgment right to cure lease defaults in summary proceedings (RPAPL §§751 and 753)); Lombard v. Station Sq. Inn Apts., 94 A.D.3d 717 (2d Dept. 2012).
The nonjudicial foreclosure route is a harsh remedy (and therefore, in some circumstances, an apparently attractive one), because the cooperative shareholder does not have an opportunity to defend the claim in court at all, unless the impacted individual goes to Supreme Court to obtain a stay, together with other appropriate relief. But if a shareholder secures a stay of the sale, then the co-op's strategy will have completely backfired, because in Supreme Court, unlike Housing Court, parties are entitled to discovery as of right, and the categories of damages (including legal fees) are not restricted. Moreover, Supreme Court actions often take years to resolve, unlike Housing Court cases, which are intended to be "summary" in nature. And, since some proprietary leases contain clauses that could trigger a requirement on the co-op to reimburse the shareholder for attorney fees incurred in successfully prosecuting the action, the consequences could be financially disastrous for the co-op.
Consequently, the argument that a shareholder will likely be dissuaded from commencing an action in Supreme Court to enjoin the co-op from prosecuting a nonjudicial foreclosure is unconvincing. Because the shareholder's home, and significant equity in an apartment, is at risk of being forfeited by a public auction (where the sales price is often well below market value), it is quite likely that legal action will occur in response to such a maneuver by co-op boards.
While the proffered strategy could work in isolated instances, and a shareholder might pay the claimed arrears in full to avoid engaging in litigation or risking the forfeiture of his or her co-op unit, such action is an extremely risky gambit, and is also arguably frivolous, which would be consequential to the attorney who employs such a method. Co-op boards should therefore be fully advised of the risks involved before authorizing such a perilous course.
Undeniably, HSTPA makes it more difficult to collect maintenance arrears, additional rent charges, and legal fees. But these charges are certainly recoverable in a separate action for money damages, and all litigation costs will likely be borne by the shareholder. Pursuing unpaid maintenance in Housing Court, and any additional maintenance charges in a separate, plenary action, is the safest and more cost-effective option.
Andrew J. Wagner is a shareholder in the New York office of Anderson Kill P.C.
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