The Borough of Merchantville case appears to serve as a good reminder for lenders to review periodically the condemnation clauses in their mortgages.

In a recent decision, the Appellate Division of the Superior Court of New Jersey has held that New Jersey law does not require a condemning authority to negotiate with a mortgagee, which has obtained a final judgment of foreclosure on the subject property, prior to the initiation of an eminent domain action. Borough of Merchantville v. LB-RPR REO Holdings, LLC, No. A-3745-11T4 (App. Div., 2013).

New Jersey law requires a condemning authority to conduct bona fide negotiations with a prospective condemnee prior to filing a complaint in condemnation. These negotiations entail, at minimum, "an offer in writing [based upon an approved appraisal] by the condemnor to the prospective condemnee holding the title of record to the property being condemned," prior to initiating a condemnation action. N.J.S.A. 20:3-6. Such negotiations are a jurisdictional prerequisite to a condemnor’s ability to proceed with a condemnation action.

In Borough of Merchantville, in response to the Borough's filing of a complaint in condemnation, the lender objected to the condemnor's authority to condemn the subject property based on an alleged failure of the Borough to conduct bona fide negotiations. The lender asserted that it was the real party in interest because it had a final judgment of foreclosure and had taken possession of the property. Moreover, it had advised the Borough of the foreclosure action at the time the condemnor's offer was made. Thus, based on its being the judgment holder and the party in possession of the property, the lender claimed the condemning authority was obligated to negotiate with it as the true "stakeholder and only party with a genuine interest in negotiating the sale of the property." The trial court disagreed, finding that New Jersey law imposed no duty to negotiate with a lender who was not the record owner of the property at the commencement of negotiations.

In affirming the trial court's decision, the Appellate Division explained that the rationale for requiring negotiations with the "owner of record" is that it allows a condemning authority to avoid the challenging proposition of negotiating with each party who may hold an interest in a property targeted for a taking. Although the mortgagee in Borough of Merchantville had obtained a final foreclosure judgment, the Appellate Division held that the condemning authority was not required to include the mortgagee, whose name "was not recorded on the Borough's rolls as the 'owner of record,'" in its pre-condemnation negotiations. Rather, in such instance, the mortgagor still was the "record owner" of the property. The Appellate Division added that if negotiations with the record owner fail and a condemning authority files a complaint initiating the eminent domain action, the law nevertheless protects parties with an interest in the property—including a mortgagee—by requiring the complaint to name such parties as defendants, and further allowing them to participate in the valuation portion of the proceedings.

In 2012, New Jersey trailed only Florida in the percentage of homeowners with seriously delinquent loans. This percentage increased from 11.4 percent in 2011 to 12.7 percent in 2012.¹ Non-residential foreclosure filings in New Jersey have risen from 3,827 in 2009 to 5,027 in 2011.² As loan delinquencies and foreclosures continue to be a significant concern in New Jersey, lenders may encounter a situation similar to the Borough of Merchantville case. Lenders should be aware that initiation of a foreclosure proceeding and even the successful resolution of a foreclosure action may not be enough in New Jersey for a condemning authority to include the lender as a required party to any pre-condemnation negotiations.

The Borough of Merchantville case appears to serve as a good reminder for lenders to review periodically the condemnation clauses in their mortgages. Even though eminent domain occurs on a less-than-regular basis, a lender may want to ensure that its interests are not left unprotected in a situation where the mortgaged property is condemned. Accordingly, a lender should consider reviewing its condemnation clause to determine the extent of the protections that the condemnation clause provides to the lender. At minimum, the clause should include a provision requiring an owner to provide written notice to the lender of any attempt by the government to acquire the property through eminent domain. Further, lenders should consider including language to allow the lender to participate in any negotiations between the condemning authority and the borrower, as well as any subsequent valuation proceedings. The lender may further seek to include language providing, in the event of a default under the loan agreement, that the lender shall have the authority to control or approve any decisions regarding the acceptance or rejection of any condemnation award.

For Further Information

If you have any questions about this Alert, please contact George J. Kroculick, David R. Augustin, Michael J. McCalley, Christopher Bender, any member of the Real Estate Practice Group, any member of the Eminent Domain and Land Valuation Practice Group or the attorney in the firm with whom you are regularly in contact.

Notes

1. John Gittelsohn & Prashant Gopal, "New Jersey Suffers as Defaults Exceed Nevada: Mortgages," Bloomberg Businessweek (Feb. 11, 2013, 8:30 a.m.), http://www.businessweek.com/news/2012-09-18/new-jersey-housing-suffers-as-defaults-exceed-nevada-mortgages.
2. Joe Tyrrell, "Foreclosures Still Climbing for Commercial Properties," NJ Spotlight, (Feb. 12, 2013, 5:46 p.m.), http://www.njspotlight.com/stories/12/0408/2002/.

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