(A) – Payment
Virtually every mortgage will provide that the mortgagee (i.e., the bank or lending institution) is entitled to the entire condemnation award to be applied against the mortgage. However, in partial takings (i.e., where the government takes less than the whole property), the mortgagee, upon request, will often waive this right or will agree to share the award with certain conditions. Of course, even where the mortgagee takes the entire award, it reduces the mortgage so the fee owner realizes a benefit.
(B) – Mortgage Interest
It is a peculiar and little known concept that unless there is a specific provision in the mortgage to the contrary, upon a taking, as a matter of law, the interest rate on the mortgage security is deemed changed to the rate paid by the condemning authority. For example, if the mortgage rate is 11% and the State takes the property, the rate to which the bank is entitled on the mortgage after vesting is 9%. If there is a prepayment penalty, the condemnor may be liable for such penalties. [Interest on a mortgage is actually somewhat more complicated. The interest rate on the mortgage (i.e., the security) is reduced, but the bank may still, at its option, choose to sue on the mortgage note — thereby preserving its higher interest rate.] See EDPL §702.
(C) – Partial Take/Mortgage
Where only a part of the property is acquired, and there is a mortgage in existence which covers that part of the property not acquired or where there is a blanket mortgage covering property not a part of the condemned premises, payment should be continued under the terms of the mortgage so as to avoid a default in the mortgage as to that part of the property not condemned.
Posted in: Condemnation