What happens when a bank is on the eve of a foreclosure sale and a municipality wants to acquire the property being foreclosed by eminent domain?  If the pre-litigation offer is rejected by the owner, is the bank entitled to take over the negotiations as the true party in interest? The Appellate Division recently reviewed these issues and held that the condemning authority is only required to make an offer and negotiate with the “record owner”, not a foreclosing mortgagee or any other party.  Merchantville v. Malik & Sons., docket no. A-3745-11T4 (App. Div. Feb. 5, 2013).  Also, the Appellate Division once again held that a property owner must do more than simply reject an offer if it wants to challenge the bona fides of the condemning authority’s negotiation tactics.

In Malik, the property owner received a written offer from the municipality to acquire the property.  The property owner rejected the offer for several reasons, including the fact that the offer was not sufficient to pay off the mortgage and liens on the property. The property owner’s counsel invited the municipality to increase its offer by stating “we would however be in a position to discuss more reasonable compensation in amounts which would satisfy all liens and encumbrances on the property.  Please feel free to contact me if the Borough is willing to discuss a more reasonable sale price for the property.”  It is important to note that the rejection letter did not provide any evidence that the value was too low or otherwise attack the sufficiency of the municipality’s appraisal.

When the offer was made, the property was being foreclosed by a lender.  The lender contacted the municipality to advise about the foreclosure and requested that the eminent domain case be delayed until the lender obtained title by way of a sheriff’s sale.  The municipality declined the offer and commenced the eminent domain case before the sheriff’s sale was completed.

The lender was named in the eminent domain case since it held a mortgage on the property.  As a party to the case, the lender filed a motion to dismiss the complaint arguing that as a mortgagee on the eve of foreclosure, it was the true party in interest and the municipality was required to negotiate with the lender before filing the eminent domain case.  This argument was easily dismissed by the Court since the statute in question only requires the municipality to negotiate with the entity holding “title of record to the property being condemned.”  Like prior cases, this is the entity who holds fee simple title to the property (ie. who is on the deed).  Since the lender had not acquired title, it was not entitled to participate in the negotations.

The lender also challenged the bona fides of the offer and the appraised value, and presented evidence to the court that the property was previously under contract for significantly more money.  However, this evidence and other problems with the appraisal were not presented to the municipality at the time the owner responded to the offer.  As a result, it was too little too late.

If a property is under water and the owner is not interested in negotiating with the condemning authority, a lender must act quickly to protect its rights.  Being a lender alone does not entitle it to participate in the pre-litigation negotiations.  Lenders may want to obtain a deed in lieu of foreclosure in order to become the record owner.  If this is not feasible, a lender needs to make certain the owner not only responds to an offer in a timely manner, but presents sufficient evidence of value to force the condemning authority to reconsider its initial offer.

Tim Duggan is a Shareholder in Stark & Stark’s Eminent Domain Group in our Lawrenceville, New Jersey office. For questions, or additional information, please contact Mr. Duggan.