New York Mortgage Lien Priority Issues in Condominium and Cooperative Apartment Foreclosure
The New York Condominium Act provides that a lien for common charges filed by the condominium board of managers (or homeowners association) has priority over all liens except: (1) certain tax liens, (2) liens for certain state agency loans, and (3) all sums unpaid on a first mortgage of record. N.Y. Real Prop. Law § 339-z.
Thus, a lending bank seeking to foreclose its first mortgage lien is in a much better position than a condominium association seeking to foreclose its lien for common charges. And not surprisingly, serious disagreement can and does arise as to what constitutes a first mortgage lien for purposes of the statute.
For instance, often due to a prior default, a first mortgage lien may be consolidated and extended, to include unpaid interest and amounts advanced by a lender for real estate taxes, insurance, etc. The resultant Consolidation and Extension Agreement (“CEMA”) executed by the Borrower(s) and recorded by the county, is essentially a refinance which rolls up unpaid amounts into an often larger, modified loan. Lending banks use this practice to assist borrowers, and as a refinancing mechanism which works to avoid paying mortgage tax twice on the original mortgage amount.
However, does a CEMA retain lien priority over a subsequently recorded condo lien for unpaid association dues as a “first mortgage”, or does the unconsolidated mortgage constitute the “first mortgage lien” for purposes of RPL 339-z? The New York Court of Appeals has held that a CEMA retains lien priority over a later recorded condo lien. (Plotch v. Citibank, 2016 NY Slip Op. 03648, Court of Appeals, Decided May 10, 2016). This makes sense. A lending bank would not give a CEMA unless they maintained their senior lien position. And if the alternative were the case, a lending bank could simply take other action to protect itself. For example a lending bank could simply pay off the first lien loan with the proceeds of a traditional refinance, thereby creating a new first mortgage with the requisite lien priority, in effect achieving the same results as a CEMA but with additional expenses to the borrower, mainly, the twice paid mortgage tax.
However, a condo lien recorded between the execution and recording of a first mortgage lien and a CEMA, is considered an intervening lien, which has priority and cannot be subrogated to the CEMA. See Dime Sav. Bank of N.Y. v Levy, 161 Misc 2d 480, 482 (Sup Ct, Rockland County 1994).
Conversely, RPL 339-z does not apply to a loan securing cooperative apartment shares. Indeed, cooperative shares are not real property but personal property. With ownership of shares of stock of a cooperative apartment corporation, come rights to a certain proprietary lease. This lease is appurtenant to a specific apartment within a building owned by the cooperative corporation. It is this specific apartment which is occupied by the shareholder. As security for its loan, a lending bank is given not a mortgage by the borrower but a security agreement.
In New York State, a cooperative corporation generally has lien priority over a lender’s security agreement. Present in the standard New York cooperative apartment lease is a clause entitling the cooperative corporation to have rights senior to that of a financing bank with regards to any lien resulting from the non-payment of monthly maintenance charges (often referred to as the co-op “rent” account). Co-op monthly maintenance can consist of principal and interest paid on financing used to purchase or improve the apartment building, real estate taxes due on the building and land, costs for building maintenance, security, insurance, the cost of a doorman if applicable, and other various charges.
It goes without saying that there is great incentive for a co-op borrower, and a co-op lender, to keep the cooperative’s monthly maintenance account current. Failure to do so may certainly and quickly result in a cancellation of the proprietary lease, leaving both the shareholder and the lender with little or no recourse.
Since a lending bank lacks complete lien priority when dealing with co-op financing, credit standards placed by banks upon co-op borrowers can understandably be more stringent.
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