by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
MORTGAGES; RESIDENTIAL RENTAL PROPERTY; LENDER'S DUTY: Mortgagee of residential premises has duty, following judgment ordering foreclosure, but before foreclosure itself, to take reasonable actions to maintain premises for benefit of tenants.
Department of Housing Preservation and Development v. Greenpoint Savings Bank, 646 N.Y.S.2d 601 (Civ. Ct. 1995).
This case was brought by the New York administrative authorities, but the opinion is so incredibly broad that it would support an action by tenants or even other third parties injured by the mortgagee's breach of the duty the court invents. The court here fined the bank $250 per day for failing to provide heat and hot water to the premises.
The mortgagee had obtained a judgment of foreclosure and sale upon but delayed twenty nine months in completing the foreclosure sale. During that time, the mortgagor was nowhere to be found. The mortgagee did *not* get a receiver appointed and did *not* collect the rents. Aside from paying the property taxes, the mortgagee ignored the property completely. In the end, an affiliate of the bank bought the property at the foreclosure sale. During the period prior to the sale, the property deteriorated substantially, to the injury of the tenants on the property (who apparently paid no rent for this period).
The court, citing no authority, is nevertheless quite forceful in its assertion of the landlord's breach of duty. According to the court, a mortgagee must act not only to safeguard its financial investment but to safeguard the lives and safety of those who occupy the building. The mortgagee allegedly had a duty to inspect and secure the building, to seal off any vacant apartments and areas exposed potential vandalism, criminal activity and the weather. Even more significantly, the mortgagee a duty to provide essential services to those living in the apartments.
The court characterized the mortgagee's position and defenses (which it does not describe) as reminiscent of King John's responses to his barons that led to the presentation of the Magna Carta at Runnymede. It also admits that the Department seeking fines in this case, which, unlike the Bank, really does constitute the government, had the power to seek a public administrator to take over the property and protect the tenants, but it forgives the City because, it says, the City had no knowledge of the conditions and no duty to discover them. The mortgagee, on the other hand, in the view of the court, did have such a duty.
Comment 1: The language of the court is so broad that there is no reason to limit it to suits by the City of New York housing officials. Further, there seems to be no reason to limit the overall duty to circumstances in which the lender has delayed foreclosure sale following an order of foreclosure. These facts might be relevant in determining breach, but the court appears to conclude that the mortgagee's duty arises simply out of the power it wields as mortgagee. Since the mortgagee can control the landlord's behavior and can control the rent flow, it has a duty to do so.
Comment 2: The case is quite reminiscent of the analysis of Fleet Factors, which haunted the lives of mortgagees in the Eleventh Circuit for a number of years prior to recent curative legislation. But the broadest implications of Fleet Factors were contained only in dicta. Here the court's statement of the lender's duty forms a more direct part of the holding.
Comment 3: Dirt readers who have criticized the activist court decisions in New Jersey (and those who have praised them) have new grist for their respective mills. The language of this decision is the most far reaching (and, in the view of the editor the most irresponsible) imposition of duty on a real estate lender since Fleet Factors, and has even less legal justification.
Comment 4: The editor is not unmindful that tenants live in wretched conditions when landlords abandon their buildings, and that mortgagees make money when they lend on real estate, but these two naked facts, standing alone, do not establish a policy that lenders, as opposed to the public at large, ought to bear the burden of curing the wrongs imposed by irresponsible landlords.
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