By Michelle Tomko
In a perfect world, associations are not supposed to be landlords. But things happen. People lose their jobs, owners pass away leaving their units in limbo, and global events such as the Great Recession can even impact the financial well-being of owners. These types of events can all cause properties in an association to be abandoned. When this happens, what is an association to do? Often the right move is for the association to request a receivership.
Thomas S. Onder, attorney and shareholder with Stark and Stark in Lawrenceville, New Jersey explained what a receivership is. “A rent receivership is set up through the courts in the State of New Jersey. Basically, the court appoints a third party to manage and operate the unit. During the Great Recession, this was an invaluable tool for some associations to keep the unit safe, secure and producing rents, while owners of record were just walking away from their units and banks who held mortgages just let the unit languish,” he said.
For example, an owner could have a renter in their unit when a bank forecloses. The owner may abandon the unit, and the renter possibly stays or goes. It is unknown if the owner does or does not continue to collect rent, however the association fees go unpaid. “The State of New Jersey allows an aggrieved party, such a condominium association to move for what’s called a rent receivership. Which is to say an association can state that they are concerned for the health and safety of the tenant, the association and the unit,” said Onder.
“The association can file a motion with the court on notice to the owner of the unit as well as the tenant and request a receiver be appointed to manage and operate the unit, to ensure the unit is safe, to collect rents, and if there’s a judgment owed by the owner request that the court allows the association to pay down that judgement,” explained Onder.
It is up to the courts to decide what else they are willing to let you pay down. “You can request that the court in some circumstances allow you to pay additional assessments going forward. Although the courts are usually only willing to let you pay down the outlying judgement that the owner would have,” he said.
What is the money collected from any rent used for? “In the order, an association should request the receiver make payments for any repairs and any out-of-pocket costs incurred for bringing the unit up to a rentable state. In addition, the association should request the underlying judgement be paid down and also for receiver commissions. An association may also request that it be allowed to pay taxes, in some circumstances to avoid a tax sale,” said Onder.
When do you think it is appropriate to set up a receivership for a unit? “We recommend if there are four (4) criteria met: 1) If the owner has abandoned the unit; 2) the association has a judgement against the owner that it has been unable to collect; 3) the unit is in a rentable condition; and 4) a sheriff sale is not imminent,” he said.
“Prior to proceeding with a receivership, we highly recommend an association have their property management company review the unit, taking pictures and providing an assessment of the state of the unit. If the unit is in good shape and really doesn’t require a significant outlay of funds to get it in rentable shape, then it may be a good candidate for the association to proceed with a rent receivership,” he continued.
What if the owner or tenant trashed the place? “If the unit is in bad shape, then what we do is ask the management company to put together some cost estimates. It really then comes down to an economic decision for the association,” said Onder.
Who is responsible for maintaining the unit during the receivership? “The receiver is given the authority. They are a third-party designated by the courts,” he said.
For ease of transition, Onder often recommends the management company get involved early on. But you must proceed with caution. “In a lot of cases, we request that the property management company, who is already servicing the association, be named as the receiver. However, receivers are appointed by the court and thus officers of the court. They have an obligation to carry out the directives in that court order — manage the unit properly, ensure that the unit is taken care of, and that they are complying with the court order,” said Onder.
If the unit needs repairs, from where do funds for those usually originate? According to Onder “the association would front the costs for the repairs to the unit. So long as the repairs are reasonable and allowed to be paid by the court order, the receiver could then reimburse the association. But it is important to ensure that the repairs and any payment for the same be an ‘arm’s length’ transaction because the owner and or other parties could later object to the payment.”
What if the tenant in the unit doesn’t pay the rent or causes damage to the unit or common areas? “We recommend that the receiver order provide that the receiver can enforce any actions for the tenancy. The receiver would then step in the shoes of the owner/landlord,” Onder stated. “If the original owner/landlord had a tenant, the receiver should send a letter with the order advising that it has been appointed as a receiver and demanding a copy of the signed lease and all rents. In addition, the receiver should inquire as to the status of the security deposit and comply with the New Jersey Security Deposit Act,” he added.
What if the tenants don’t comply with directions? “If they don’t, the receiver can simply file an eviction action in the State of New Jersey. It usually takes two or three weeks from the time you file the eviction action for non-payment to get to court. If successful in court, the court will enter an order for possession and allow the receiver to request a warrant for removal and have the sheriff forcibly remove the person in about a week. The same thing goes for people disturbing the peace or some other violation of policy and procedure of the association. However, those violations require a notice to quit and cease to be sent, which could add an additional 30 to 45 days,” Onder said.
Does a board have a fiduciary responsibility to rent abandoned units? According to Onder “the board doesn’t. The receiver has a fiduciary duty to manage the unit.” There is a difference between managing and renting. “The receiver can simply put locks on the unit and ensure the unit is winterized to avoid freezing pipes and the like,” he said.
Can a receiver rent out abandoned units that have multiple liens from multiple sources like the Internal Revenue Service (IRS) or state and local municipalities against them? “The issue really is when does someone foreclose their interest and take back title? One of the things besides figuring out what the costs are going to be before you file a receiver action is also to take a look at what liens are there and where they are in the process. They may be two years out from actually foreclosing,” said Onder.
Onder said to begin with finding a good expert. “At the very start, you need competent counsel to be able to walk through the options and give them what their worst-case scenario is.”