So They Demolished Your Building (The One Where You Have A Mortgage) Who Would Do That?

Who would want to do that?  Well, there are municipal authorities (particularly, although not exclusively, New York City) which seek to demolish properties which may present a danger to residents or the community.

If a property upon which a lender or servicer holds a mortgage is in such terrible shape that it may be subject to a demolition order, obviously, it is a serious situation, one which under ideal circumstances would never have gotten that far.  But it does happen.  Should a local governmental authority be persuaded that demolition is necessary, there is then a legal obligation that they notify those with an interest in the property of the intention to demolish.  In that fashion, parties such as the owner and mortgage holders can come forward either to remedy the situation or oppose the action if it is believed to be baseless or unnecessary. Thereby,  the parties can protect themselves. There are no easy answers to this, but at least there is an opportunity to preserve the integrity of the security.

What happens, though, if the municipality neglects to give notice to a mortgage holder?  A fairly recent case tells us that where the agency is aware of the existence of the mortgage, notice must be given to the mortgage holder. [Home Doc. Corp. v. City of New York, 297 A.D.2d 277, 746 NYS2d 42 (2d Dept. 2002)].

In the noted case, the mortgagee had begun a foreclosure action and named the City of New York as a defendant.  And a lis pendens was filed. During the pendency of the foreclosure, New York City inspected the premises, recommended demolition and thereafter actually demolished the building without giving the mortgage holder any notice of the intention to do so.  Under these circumstances, the court found it to be a violation of due process to demolish a structure without giving notice and an opportunity to be heard to a party who has a valid interest in the property.

What saved the mortgage holder was that it was able to prove not only its valid mortgage, but that the City had knowledge of that mortgage. What was not clear from the case was whether the court concluded that knowledge was based upon the fact that the City was named in the foreclosure or because of the filed lis pendens or because there was a recorded mortgage on file.

Even though the decision did not make it clear, we believe that the recording of a mortgage is the notice (called constructive notice in New York) which tells the world of that interest and it is that which requires a municipal authority to advise a mortgage holder of an intention to demolish.

In the end, this case offers some comfort that should a municipal authority err in not giving notice, a suit for damages by the mortgage holder who was kept in the dark would be in order.

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.