Demystifying Aztech Recognition Agreements in Real Property

What is an Aztech Recognition Agreement?

Aztech Recognition Agreements (or just, "Aztechs"), are fairly bog-standard documents in the real estate world that you have probably never heard of. To wit, when you purchase a unit in a residential co-op building, you are actually buying stock in a corporation that owns the building; the real estate is an asset that is owned by the building corporation, and the unit owners’ stock is the means by which the building corporation keeps track of ownership. As an owner of the corporation’s stock, you have the right to use (but not own) the real property – i.e., your back room – in accordance with the terms of the proprietary lease between your unit and the building corporation. In other words, the building corporation permits you to occupy your personal apartment space via an agreement to that effect. You can’t sell your space in the co-op building, but you can sell your shares in that corporation (as long as you adhere to the building corporation’s bylaws and house rules). When units are being purchased in a co-op building, your lender (i.e . , the bank who gave you the mortgage), will almost always want to see a copy of your building’s bylaws and proprietary lease. They will also ask for something called an "Aztech Recognition Agreement."
Simply put, the Aztech Recognition Agreement is a three-way arrangement between you, the unit owner, your bank (the unit purchaser’s lender), and your building corporation, in which the building corporation agrees to recognize the lender’s lien in your shares of the corporation, and in the proprietary lease on your unit. The Aztech Recognition Agreement is supposed to protect you, the unit owner, and your lender once you’ve purchased and own your unit via the corporation’s stock. If your lender is forced to foreclose on your mortgage, they will want to do so, not just on your shares in the building corporation, but also on your proprietary lease in your unit within that same building. In fact, the unit owner’s proprietary lease, if it is not terminated at the same time as the mortgage foreclosure, will definitely deteriorate in value so long as the foreclosure is pending.

Importance of Aztech Agreements to Lenders

Lenders require Aztech Recognition Agreements for the simple reason that they represent a promise from a borrower that a lender will always have priority over all other claims, including statutory claims. If a borrower is a debtor in an insolvent estate, it can happen that such debtor grants an encumbrance to another creditor, which claim ranks prior to the claim of the institution that granted the loan.
If such assignment occurs, and an Aztech Recognition Agreement is missing, the lender may not succeed in enforcing its claim, despite the fact that the borrower did grant security to the lending institution. Such borrower still has the possibility of granting a security interest, and of granting such to unsecured creditors, in contravention to the priority of security already granted by the borrower. The lending institution then loses the opportunity of being repaid, because the other creditor now has priority over its claim due to insolvency of the borrower. In such cases however, as long a the lending institution has an Aztech Recognition Agreement signed by the borrower, the borrower no longer has such opportunity of prejudice over the lending institution. The lending institution will then have priority over all other creditors of the borrower, for the purpose of collection of its claim, such allowance being provided in the Aztech Recognition Agreement.
The other creditors can of course contest the validity of such guarantee, and can ask the court to declare that the guarantee is invalid, or to limit the scope of its application.

Function of Aztech Agreements to Co-op Owners

Aztech recognition agreements are also important to tenants who own units in cooperatives and condominiums. While not often used in condominiums, they are broadly used in cooperatives. They are similar to subordination, nondisturbance and attornment agreements used with cooperative apartment corporations, but slightly different. Aztech recognition agreements protect the interests of co-op owners by acknowledging their rights as owners of shares issued by the cooperative. The Aztech agreement will be executed by the lender after the underlying loan is made and will require the lender to comply with certain requirements of the cooperative, such as the requirement of approval by the co-op for the transfer of an apartment into foreclosure (for example, in a short sale). Under co-op and condominium bylaws and proprietary leases, co-op owners are responsible for payment of their carrying charges and condominium unit owners are responsible for the payment of their common charges. To protect the co-op or condominium if these expenses are not paid, the Aztech agreement will require the lender to pay the unpaid expenses, up to a specified amount. The amount of the unpaid expenses that the lender is required to pay under the Aztech agreement will be determined by the lender and the cooperative or condominium, and will be based on the needs of the cooperative or condominium, and the business arrangements of the lender and the cooperative or condominium. Usually, the Aztech agreement will provide that the Aztech agreement terminates automatically if foreclosure is completed or if the loan is paid off, either voluntarily or involuntarily (for example, through a deed in lieu of foreclosure or foreclosure auction), or on transfer to a successor lender or servicer.

Key Elements of a Aztech Recognition Agreement

One of the key components of an Aztech Recognition Agreement in Resolutions is the co-ops acknowledgement. The resident and sponsor must acknowledge and agree to all relevant provisions. The key components of a standard ARA include:

that the co-op board acknowledges it has approved the purchasing/resident shareholder, subject to any commercial use restrictions, agreements, or understandings relating to such proposed tenancy;
that the shareholder acknowledges its obligations and limitations to reside in the apartment and agrees to comply with all governing documents of the co-op, as may be amended from time to time , insofar as it is pertinent to such tenancy;
that the lender waives rights of offset in the event that the co-op forecloses (azteching out);
that the lender waives the right to attempt the purchase of the apartment through its "lender’s sale"; and
that the purchaser agrees to use the apartment as a primary residence for a period of two years; or purchase another apartment in the co-op if the purchaser does not comply with this provision.

There are variations to be found in other types of problems but the above essentially form an Aztech Recognition Agreement in Resolutions.

How to Secure an Aztech Agreement

An Aztech recognition agreement is started by means of a Deed poll. This deed poll can be drawn up by the owners of the strata lots in the strata scheme and the mortgagees over the strata lots. Or it can be in a prescribed form (which are various forms) that are circulated by a Registrar from time to time. The deed poll must then be lodged with the Land & Property Information Department within 12 months of the registration of the plan. The deed poll must be signed by all owners in the scheme and all mortgagees who are entitled to register a first mortgage over a lot in the scheme. In the case of a co-ownership lot, the trustees are treated as the owner for the purposes of an Aztech agreement. All trustees will be required to sign. Further, if a Council or Commonwealth or State body is the owner of a lot (on behalf of the Crown), the Minister for Lands and the Treasurer of the State will be required to sign. If that is not enough, if there is a Registered Lease over a lot, the remaining terms of the registered lease must be disclosed on the Deed poll.

Common Problems and Solutions

When it comes to positive covenants and entrance onto other land, Aztech Recognition Agreements fall short in visionary planning. The difficulty of securing an architect’s certificate from a proactive owner is compounded by the costs of insuring an agreement with someone who has already conveyed and may not own anything. The fact that an Aztech Recognition Agreement is a restriction on the freehold title means that a future registrar does not have the power to override the obligation.
Professionals are left walking a fine line between the principals of good title and the need for security with respect to the local authority and the developer. Why should a professional sign off on an interest that deals in negative covenants even though it is for the benefit of the council? Many professional liability policies are written on the basis that the professionals can be indemnified against any losses resulting from the performance of their duties, but effectively do not cover them should the indemnity involve an undertaking of a negative covenant. In order to get over the stranglehold of Aztech Recognition Agreements, the following this suggestions may be of use:

Where land is being sold subject to the positive covenant, the purchaser indemnifies the vendor for any loss or nuisance resulting from the purchaser’s failure to perform the positive covenant. The vendor requires the purchaser to pay all reasonable costs and expenses associated with the performance of the positive covenant .
By way of a condition of consent, the council agrees to provide a letter to the land owner confirming it will hold the land owner, successor in title or resident of the property indemnified for any costs and expenses associated with the performance of the positive covenant. (After the passage of time and changes in the flora and fauna and changes in society, this may become difficult to monitor.) For example, land could be labelled as suitable for a wildlife corridor but that may be no longer the case. A land swap may result in the landowner becoming the council, and where the nature of the business changes according to market pressures.
Duplicating the functions of the professional advice that would otherwise be given by amendment to the body corporate documents can also ensure that the agreement can be easily satisfied. Perhaps best articulated through imposed timetables, the conditions of consent may be expressed similarly to the standards of care otherwise imposed on the supplier of services.
Subject to the requirement of division 7.1 whereby subdivision plans must not contain restrictive covenants or additional obligations, it is worthwhile to try and avoid duplicating what is necessary under such standards. Where a subsection of the standards may impose a duty on the responsible party, consider invoking that duty instead of simply restating it in the consent.

With all of these strategies, the effective involvement of legal counsel is paramount. Imposing conditions on consent could also prove to be a way around the Aztech Recognition Agreements and may be the solution to a problematic division 7.1 in particular circumstances.