Don't Bank On It!

by: Anthony F. Della Pelle
6 Sep 2011

Mortgage Lender’s Rights in Eminent Domain Cases May Outweigh Owner’s 

Property owners in eminent domain cases rarely own the condemned property outright, without any mortgages or other liens.  Typically, the property owner took out a loan from a bank to purchase the property, and the bank obtained an interest in the property in the form of a mortgage.  Until the loan is repaid, with a pre-determined interest rate, the bank has a security interest which may be superior to the owner’s interest, entitling the lender to receive payment or to take possession of the property if the property is sold or repossessed because of the mortgage.  The mortgage, and the property interest it grants to lenders, can provide valuable protections to the lender during the eminent domain process, as highlighted in the recent article “Considerations for Banks Named as Parties in Eminent Domain Actions.”

New Jersey case law has spoken specifically on a lender’s right to recover from the proceeds generated in an eminent domain action.  In City of Englewood v. Exxon Mobil Corp., 406 N.J. Super. 110 (App. Div. 2009), the Appellate Division held that a lender is entitled to recover interest at the mortgage note rate until a reasonable period of time, usually 45 days, after the condemnation proceeds were made available for withdrawal.  Thereafter, the lender may only receive whatever interest accrues on the monies deposited by the condemning agency into the court’s trust fund, representing the condemning agency’s offer of compensation for the property.

Property owners who have properties subject to condemnation should carefully check the terms of any mortgage loan agreements in place to determine if there are any provisions which apply to eminent domain actions regarding the mortgaged property.  The mortgage lender’s rights are likely to exist not only when the entire property is acquired via eminent domain, but also when a part of a property is condemned, such as instances where partial takings occur to accomplish road or highway widenings.  Other problems may arise, such as where the entire property is taken but the amount offered by the condemning agency is less than the outstanding mortgage amount, creating a deficiency owing from the property owner (borrower) to the lender.  In that circumstance, a property owner may find himself or herself in a battle not only with the condemning authority for just compensation, but also with his or her mortgage lender to determine how the award of just compensation should be allocated.  These types of situations seem likely to occur for the foreseeable future, where mortgage loans may have been made on properties at a time when property values were higher, leaving less and less equity in the property for the owners.

For previous blog posts on banks and valuation litigation, please see the following:

Mortgage Lender’s Recovery of Interest on Condemned Parcel Limited by Appellate Court

Federal Agency Releases New Appraisal Guidelines for Financial Institutions

The author wishes to acknowledge the assistance of Cory K. Kestner, Esq., of McKirdy & Riskin, PA, in the preparation of this article.