What Constitutes A “Mortgagee In Possession”?

Just The Facts – By Karen Wachs

In a very recent court decision, the New Jersey Appellate Division was asked to determine whether a lender’s assignee that takes possession of a condominium unit when the owner/mortgagor has defaulted on the loan, and thereafter winterizes the unit and changes the locks, is considered a “mortgagee in possession” of that unit, responsible for the payment of condominium fees and assessments. The Appellate Division, by concluding that “that those discrete actions are not sufficient to render the lender’s assignee a mortgagee in possession of the unit,” reversed the entry of summary judgment and found in favor of the lender. Woodlands Cmty. Ass’n, Inc. v. Mitchell, A-4176-15T2, 2017 WL 2437036, at *1 (N.J. Super. Ct. App. Div. June 6, 2017)

In March 2007, the condominium owner purchased a unit in a property managed by plaintiff, Woodlands Community Association, Inc. The purchaser also executed a mortgage encumbering the unit which was eventually assigned in July 2013 to defendant, Nationstar Mortgage LLC. At some time thereafter, the purchaser defaulted on his obligations and vacated the unit. The purchaser also owed substantial sums to the association for unpaid monthly fees and other condominium assessments. The lender thereafter replaced the locks on the unit and winterized the property. The association sued the purchaser for monthly maintenance association fees and general services it had provided to the property, as well as the lender, alleging that the lender’s assignee was responsible for the association fees as it was in possession of the property.
In April 2016, the trial court granted summary judgment in favor of the association. The lender appealed and argued that merely changing the locks and winterizing the condominium unit did not render it a mortgagee in possession of the property. The Appellate Court agreed and reversed. In coming to its decision, the Appellate Court determined that it had to assess whether the lender “exercised the necessary level of control and management over the property to deem it a mortgagee in possession.” The Appellate Court recognized that the lender had not occupied the unit, was not collecting rents or any other profits, was not making repairs, and held that the lender’s actions of simply winterizing the property and changing the locks did not render it a mortgagee in possession, citing N.J.S.A. 46:10B–51 (obligating a lender or its assignee to maintain a property in foreclosure proceedings “to such standard or specification as may be required by state law or municipal ordinance.”).

The Appellate Court held that as a result of the default, the lender was statutorily required to protect its collateral by paying the insurance premiums and real estate taxes, as well as by winterizing the property and changing the locks. Contrary to the association’s assertion that the lender had has taken on the costs and borne the burden of the abandoned property, it hads not availed itself of the benefits of the association, but rather its actions in protecting its security served to benefit the other homeowners. Incidents of vandalism or an occurrence of frozen pipes in the vacant unit would likely lead to damage to adjoining properties. Simply put the lender was not benefitting from the limited actions it took to secure its collateral; it was simply protecting its rights. Nor did the Appellate Court hold the lender’s minimal actions caused it to be responsible under various equitable arguments.

This ruling is a bit of a blow to associations that are looking for parties to collect dues from. The importance here is that condominium associations will need to show much more than winterization and preservation efforts before a lender will be deemed a mortgagee in possession and can be held responsible for fees and assessments associated with a unit.

Karen S. Wachs, Esq, is a skilled attorney who practices as both a commercial litigator and a transactional attorney. Karen focuses her diverse practice in commercial litigation, real estate and business matters, and condominium law. If you have any questions or would like to discuss a legal matter with Karen, she can be reached via email at ksw@beinlaw.com.

The Beinhaker Law Firm provides personal and corporate services to business and professional clients. The law firm’s practice concentrates primarily in Healthcare, Estate Planning, General Business, Real Estate and Criminal Law.

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