by Gene Markin, Stark & Stark
Every day condominium associations battle delinquencies and employ creative strategies for collecting unpaid assessments. Sometimes ambitious collection efforts are successful — sometimes not. One aggressive strategy employed by associations is the appointment of a rent receivership for a vacated or abandoned unit owned by a delinquent owner. If successful, a receivership would entitle the association to collect rent for a unit it technically does not own and apply the monies received towards the owed arrearage. While the concept sounds good in theory, it is actually quite difficult to accomplish in practice given the likely upside down mortgage on the property, the inevitable foreclosure proceedings by the bank, and the fact that abandoned units are not occupied by paying tenants.
All those dissuading factors, however, did not stop one association from trying. Faced with more than $30,000 of unpaid maintenance dues for two abandoned units, Woodlake at King’s Grant Condominium Association, made an application to the Chancery Court for an appointment of a rent receiver. The Chancery Judge denied the Association’s request finding that the “extraordinary remedy of appointing a rent receiver” was not appropriate under those facts and circumstances. The Association appealed and the Appellate Division issued an unpublished decision on April 1, 2014 affirming the judge’s denial of the Association’s application. See Woodlake at King’s Grant Condo. Ass’n v. Coudriet, 2014 N.J. Super. Unpub. LEXIS 714 (App. Div. Unpub. 2014).
Despite recognizing that the Association was seeking the appointment of a receiver so that it could rent out defendants’ vacant units and recoup some of the assessment monies owed by the defendants, the Appellate Court did not find legal support or plaintiff’s arguments persuasive in favor of forcing the defendants to rent their units or for allowing the Association to rent those units to new tenants. Even though the Association’s assessment liens would remain unpaid after a foreclosure sale because the mortgage liens on the units exceeded their fair market value thereby leaving the Association with no remedy, the Appellate Division found no authority in the bylaws or in the Condominium Act for providing the appointment of a rent receiver.
Even if the Association’s governing documents did include an express provision allowing for the appointment of a receiver in case of assessment dues default and unit abandonment, the right to receivership is not guaranteed and still “subject to equitable considerations in the Chancery Division judge’s exercise of discretion.” This means that a Chancery Judge has the discretion to deny an application for receivership even when there exists an express agreement giving the moving party the right to the receivership.
While hinting that “a condominium association has the right to seek appointment of a rent receiver under appropriate circumstances,” it did not find those circumstances existed in Woodlake’s case. Not only was there no express provision in the bylaws giving the Association the right to a rent receiver, but the Association sought to rent out and collect rents from the units “without giving notice to the mortgage lender and affording the lender the opportunity to be heard.” Since a mortgage lender may be entitled to the appointment of a receiver in a foreclosure action “when it appears necessary for the protection of the mortgagee” and the mortgagee’s security interest, the court was understandably reluctant to grant receivership to the Association without the involvement of the mortgage lender.
The court’s decision finds support in the practical considerations that abound in a receivership situation. First, where no rent-paying tenant exists, one must be found, which means the unit must be cleaned, repaired, and appliances updated as necessary. Would the association be able to recoup any costs incurred in making the unit rentable? Second, if there is a foreclosure action by the bank or the Association, negotiating lease durations becomes an issue. What happens if the foreclosure proceedings come to an end during a lease period? And third, if the bank is involved, what happens if it wants a rent receiver for itself or better yet a portion of the rent received by the association? All these questions and more make the process less than straightforward and the judges hesitant about granting such an “extraordinary remedy.”
Although New Jersey courts have appointed receivers under varying and similar circumstances as those presented in Woodlake, there has been no published opinion on point. The Appellate Division’s decision here, albeit unpublished, is the first written decision to explore the balance of the equities involved in an association’s rent receivership application. While it does not explicitly identify the conditions for a successful application, the Woodlake decision does provide associations and practitioners with some key takeaways for increasing their chances of getting a rent receiver: amend the bylaws to provide for the right of receivership and notify the appropriate mortgage lenders when seeking the appointment of a rent receiver.
Gene Markin is an associate in Stark & Stark’s Construction Litigation Group where he concentrates his practice in complex construction litigation claims on behalf of community associations, developers and other plaintiffs. www.stark-stark.com.