February 2, 2017
By: J. Eric Rochford, Attorney
Generally speaking, your mortgage won’t be negatively affected by a partial land taking. However, depending on the status of your mortgage, your mortgage holder may get involved in your condemnation case and attempt to claim some or all of the proceeds. However, it’s still a good idea to keep your mortgage holder informed of a possible land taking.
In the event of a partial land taking, the condemning agency (or its buying agent) will usually want you to approach your bank to have it execute a Partial Release of Mortgage. This document releases the mortgage holder’s lien on the portion of your real estate that is being taken through the condemnation action. At this time, your bank would obviously be aware of the condemnation of your property. So telling them ahead of time would help them begin the process of a partial mortgage release. However, landowners have no responsibility to work to get partial releases executed. That responsibility lies solely with the condemning agency or buying agent.
Most mortgages have condemnation clauses, which generally operate one of two ways. The first, and most common, type of condemnation clause is a bank-take-all type of provision. This is exactly how it sounds. The clause gives the mortgage holder the right to all proceeds to be paid in the condemnation case up to the amount owed on the mortgage. Obviously, the bank can’t take more than it is owed. The second type is based upon a calculation related to how much equity you have in your property.
If your mortgage has this bank-take-all condemnation clause, then your mortgage holder can at its discretion take all of the proceeds of your eminent domain case necessary to pay off your mortgage. However, they cannot take more money than you owe on the mortgage. With these clauses, your mortgage holder can choose to take all or just a portion of the condemnation proceeds, it’s entirely up to the mortgage holder. If your mortgage holder elects to take all of the proceeds of your condemnation case, then the agreement that you have with your eminent domain lawyer could also be affected. However, that is a risk of and responsibility for your lawyer, not you, to deal with.
If your mortgage doesn’t allow your mortgage holder to elect to take all the proceeds from your condemnation case, then it most likely has a clause that allows it to take a portion of the proceeds. The amount of funds that can be taken is based upon a specific (and complicated) calculation related to your debt to equity ratio. The point of contention of a mortgage pay-down calculation is the determination of the fair market value of the property before the taking. Borrowers should be careful about agreeing in writing to anything with their bank/lender in this scenario. Be sure to protect your rights as a landowner and mortgagee and include your lawyer in conversations with your bank before agreeing to anything.
Ultimately, the most common practice for a mortgage holder is to avoid getting involved in the condemnation case. This usually only happens if its borrower is under water or behind on its mortgage. In such a situation, claiming some or all of the condemnation proceeds may allow the mortgage holder to get its borrower back on track with payments, improve the borrower’s equity position and possibly avoid a foreclosure situation. For these reasons, it can be helpful to keep your mortgage holder bank advised of your condemnation case—just make sure to do this along with the help of your eminent domain attorney to ensure your rights are well represented. If you have additional questions about how your mortgage could be affected by an eminent domain land taking, contact me.