Early last month, in Borough of Merchantville v. Malik & Son, LLC, 429 N.J. Super. 416 (App. Div. 2013), the New Jersey appellate court held that a condemning authority, under the State’s eminent domain law, was not required to negotiate with a mortgagee which had obtained a final judgment of foreclosure on the relevant property, was in possession of said property and had the right to sell said property at a sheriff’s sale. Additionally, the appellate court held that the property owner’s express rejection of the condemning authority’s offer to purchase its property and invitation to discuss more reasonable compensation was inadequate evidence that the property was worth more than the amount offered by the condemning authority and constituted a rejection of such offer permitting the condemning authority to proceed with litigation.

By way of background, the Borough of Merchantville (the “Borough”) sent a written offer to Malik & Son, LLC, the record property owner (“Malik”), to acquire a 54-unit apartment complex based on the Borough’s determination that the property qualified as an area in need of redevelopment. The Borough offered to purchase the property for $270,000 “as is” based on an appraisal. Malik rejected the offer by letter stating that the offer was far less than the amount owed to the lender for the property and invited the Borough to increase its offer. LB-RPR REO Holdings, LLC, Malik’s mortgagee (“LB”), informed the Borough that it had obtained a judgment of foreclosure, that it was the real party in interest, as it was in possession of the premises and had the right to sell the property, and, accordingly, the Borough should be negotiating with it instead of with Malik. The Borough did not respond to either letter and instead filed the condemnation lawsuit. During the condemnation proceeding, LB filed a motion to dismiss the complaint arguing, among other things, that it was the real party in interest and the Borough was obligated to negotiate with LB before filing its complaint. LB also argued that the Borough did not engage in bona fide negotiations and that the appraisal report did not represent the fair market value of the property. The trial court disagreed.

On appeal, the appellate court affirmed the trial court’s ruling holding that the condemning authority is only required to negotiate with the record title owner of the property and explaining that this rule “avoids the difficult requirement of negotiating with each condemnee having an interest in the property.” The appellate court pointed out that the law protects other parties in interest (like the mortgagee) by allowing them to participate in subsequent valuation and allocation eminent domain proceedings.

The appellate court also held that, at a minimum, “the condemning authority is required to provide the owner of record with a copy of all appraisal reports relied upon in making the offer so there can be an appreciation by the condemnee of the value on which the offer is based.” Here, the Borough provided Malik with the appraisal report and Malik failed to provide a meaningful response to the Borough’s offer. Accordingly, the appellate court found that Malik’s formal rejection of the Borough’s offer and “lukewarm invitation” to negotiate constituted a sufficient rejection of the Borough’s one-price offer and permitted the Borough to file suit.

This worst case scenario underscores the fact that until the lender has title to the property, the lender needs the borrower to act as a conduit between it and the condemning authority. Accordingly, it is important that loan documents contain, among other things, strong covenants (subject to traditional thresholds) to include lender in all negotiations with the condemning authority.

By: Krystyna Blakeslee and Margaret Budnik