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The Borough of Fort Lee v. Hudson Terrace Realty Management Corporation

2005 WL 3108187 (N.J. Super. App. Div. 2005) (Unpublished)

CONDEMNATION—A condemning authority has no obligation to engage in bona fide negotiation with the holder of a mortgage even if the mortgage exceeds the value of the property.

A property containing an unfinished office building was the subject of condemnation. The property was encumbered by two mortgages totaling $55 million. The condemning authority made a written offer to the record title owner to purchase the property for $600,000. The mortgages required the borrower-owner to notify the lender, to allow it to participate in condemnation discussions, and granted the mortgagee an assignment of the condemnation proceeds. Nonetheless, the lender was not notified until late in the process. At that time, it attempted to participate in negotiations but the condemning authority “refused to negotiate” with the lender “because it was not the record title owner of the property.” The lender advised the condemning authority “that it would be obtaining title to the property in order to participate in the negotiations. Before the transaction was completed, however, [the condemning authority] filed its complaint in condemnation, order to show cause, and declaration of taking.” Commissioners were appointed and the lower court denied the lender’s request to “dismiss the complaint for failure to engage in bona fide negotiations” which are a statutory pre-requisite to filing a condemnation complaint. The lender appealed. There was no question that once the lender became aware of the condemnation proceeding it immediately endeavored to engage in negotiations over the value of the property. Nonetheless, the lower court and the Appellate Division agreed that the condemning authority “had no obligation to engage in bona fide negotiations with [the lender] as the lienholder, and that the negotiations with the record title owner prior to the filing of the complaint were made in good faith.”

On appeal, the lender contended that the condemning authority “was obligated to negotiate with it prior to filing a complaint because [the condemning authority] had actual notice of the two recorded mortgages ‘that far exceeded the value of the property’ and gave [the lender] a 100% interest in any offer or award.” The purpose of the requirement that a condemning authority engage in bona fide negotiations with the property owner “is to encourage acquisitions without litigation, thus saving both the acquiring entity and the condemnee the expense and delay of litigation.” The lower court, in rejecting the lender’s request, relied on a New Jersey Supreme Court case which denied the holder of a ninety-nine year lease the right to participate in condemnation negotiations. The lender was asserting that the case was not controlling “because it dealt with a tenant, whose interest in the property was not recorded, and that the language about other interested parties was [merely] dicta.” Instead, the lender in this case contended that the condemning authority “was on notice of its interest in the property because its mortgages were duly recorded.” Both the lower court and the Appellate Division rejected that argument as having no merit. Each court relied on the plain language of the statute which requires “a written offer to the condemnee holding the title of record, not the holder of a recorded interest in the property.” On a factual basis, the Court rejected the lender’s assertion that the condemning authority did not make a bona fide offer. The lender tried to argue that the tax assessment, being much higher than the offer made by the condemning authority, provided evidence of value and consequently provided evidence of bad faith on the part of the condemning authority. The Court rejected that argument because “it is the generally recognized rule that the assessed valuation of property for purposes of taxation is ex parte and may not be received in evidence to prove market value in ... [condemnation] proceedings.” Essentially, the Court found it apparent that the lender’s main objection to the condemnation was that the condemning authority’s offer was too low. As to that issue, the Court stated that “objections to the offer should be directed to the commissioners at the hearing on valuation.”

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