When Is Possession Not Really Possession? (And By “Possession” I Mean In The “Mortgagee In Possession” Sense Of The Word)

by:  Peter J. Gallagher (@pjsgallagher) (LinkedIn)

Lenders are often faced with a dilemma when dealing with property that is in foreclosure and has been abandoned by the borrower. A lender must, under New Jersey law, maintain the property "to such standard or specification as may be required by state law or municipal ordinance." Also, the lender has an obvious interest in protecting the value of its collateral. But the lender does not want to take "possession" of the property and be deemed a "mortgagee in possession," because that would impose upon the lender the duty of a "provident owner," which includes the duty to manage and preserve the property, and which subjects the lender to liability for damages to the property and damages arising out of torts that occur on the property. Unfortunately, the point at which a lender takes "possession" of property is not entirely clear. I have written about this before, and the Appellate Division's recent opinion in Woodlands Community Association, Inc. v. Mitchell provides some additional guidance, which should be helpful to lenders.

In Woodlands, defendant was the assignee of a note and mortgage related to a unit in plaintiff's condominium development. The unit owner defaulted on the loan and vacated the unit. At the time, the unit owner was not only delinquent on his loan payments, but also owed "substantial sums" to the association for "unpaid monthly fees and other condominium assessments." After the unit owner vacated the unit, defendant changed the locks and winterized the property. (As the Appellate Division noted, "[w]interizing entails draining the  pipes, turning off the water and setting the thermostat for heat to protect the pipes.") After the unite owner vacated the unit, plaintiff sued him to recover the delinquent fees. It later amended its complaint to include the lender, "alleging that [[the lender] was responsible for the association fees as it was in possession of the property."

Both parties moved for summary judgment. The trial court granted plaintiff's motion, holding that defendant was a mortgagee in possession and therefore was liable for the maintenance fees. On the key of issue of what it meant to be in "possession" of the unit, the trial court held as follows: "[D]efendant held the keys, and no one else [could] gain possession of the property without [defendant's] consent. This constitutes exclusive control, which indicates the status of mortgagee in possession." Defendant appealed. 

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Chancery Division To Condo Association – No Rent Receiver For You

In New Jersey, condominium associations often face an uphill battle when trying to collect on delinquent owners’ accounts.  A recent decision out of the New Jersey Chancery Division marks another setback in this regard, as it held that an association was not entitled to the appointment of a rent receiver to collect and forward rents associated with a unit that was in foreclosure.  If nothing else, this decision emphasizes the importance to condominium associations of including appropriate collection and remedial provisions in their governing documents.

In Paddington Square at Mahwah Condominium Association, Inc. v. Sanzari, a unit owner defaulted on its mortgage, and both the first mortgage-holder and the condominium association initiated foreclosure proceedings.  At the same time, the condominium association moved for the appointment of a rent receiver to forward any rents collected on the unit by the unit owner to the association.  However, the court denied the association’s request because: (1) the association’s governing documents lacked any specific provision for the appointment of a rent receiver; (2) the governing documents did not require the unit owner to rent his unit to a tenant; (3) no tenant currently occupied the unit; and (4) the association failed to give notice to the first mortgage-holder, which had also foreclosed on the unit.  What this decision makes clear is that, in communities where unit owners are permitted to rent their units, associations should ensure that the governing documents authorize the association to seek the appointment of a rent receiver in addition to foreclosing on a unit in the event of a unit owner’s default in maintenance payments.