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Lineliv, LP v. Steliga Homes of Evesham, LLC

A-6312-07T3 (N.J. Super. App. Div. 2009) (Unpublished)

MORTGAGES; AGREEMENTS — Once a mortgage is in default, absent language to the contrary in the mortgage, a mortgagee is not required to honor the lot release provisions of the mortgage because a material breach by one party relieves the non-defaulting party of its obligation of continued performance.

A buyer purchased nineteen building lots using a purchase-money mortgage and note. The seller assigned the mortgage to a third-party. The assignee acknowledged that the mortgage expressly provided for the release of lots pursuant to a payment schedule attached to it. The buyer defaulted on the notes and a default judgment was entered. The buyer appealed the default judgment, alleging that the default should not have invalidated the lot release provisions included in the mortgages. The lender also appealed, arguing that the lower court erred in refusing to award damages that included a five percent late charge included in the notes.

The Appellate Division affirmed on all accounts. First, the Court rejected the lender’s argument that the five percent late charge should have applied. Generally, in commercial matters, a five percent liquidated damages provision in contracts involving sophisticated parties is deemed to be presumptively reasonable. Here, however, the lender’s principal testified as to the punitive nature of the late charge. The Court held that this was sufficient to overcome the presumption of reasonableness. It also noted that the principal made no attempt to explain in his testimony whether the late charge had a relationship to any damage lender may have sustained as a result of the delay in payment. Finally, the Court also rejected the borrower’s contention that the lender should have been obligated to provide lot releases on some of the lots that were sold, despite the fact that it defaulted on the note. The Court ruled that a material breach by one party relieved the non-defaulting party of its obligation of continued performance. It noted that there was no specific language in the notes suggesting the parties’ intention to permit lot releases after the borrower’s default. It also saw no distinction between recourse and non-recourse loans, and held that if the borrower was permitted to obtain a release under these mortgages, the lender would effectively have no remedy.

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