Skip to main content



Westmark Commercial Mortgage Fund IV v. Teenform Associates, L.P.

362 N.J. Super. 336, 827 A.2d 1154 (App. Div. 2003)

MORTGAGES; REMEDIES—A court analyzes a borrower’s challenges to the amount of late fees, the default interest rate, prepayment penalties, and attorneys’ fee and upholds all of those provisions on the basis of their reasonableness.

In the context of a mortgage foreclosure action, the borrower disputed its lender’s claim for late fees, default interest, prepayment fees, and attorneys’ fees. The promissory note provided for all four items.

The note provided for a late charge of six percent of the overdue amount. The borrower contended that this was a penalty and not representative of the actual damages that the lender would incur. It pointed to a 1964 case that set forth the proposition that “[p]arties to a contract may not fix a penalty for its breach ... such a contract is unlawful.” The Court rejected this based, in part, based on the New Jersey Supreme Court’s 1999 opinion in MetLife v. Washington Avenue Associates, L.P., 159 N.J. 484. In that case, the Court held that the test is whether a late fee is reasonable and that “liquidated damages clauses in a commercial context between sophisticated parties are presumptively reasonable.” The burden to show otherwise is on the party challenging the unreasonableness of a particular charge. That case recognized that “five percent was not an unusually large or unreasonable fee in commercial transactions.” Here, the borrower presented no evidence that six percent was unreasonable in the context of the case, and consequently did not overcome the presumption of reasonableness.

The note also provided for default interest at two percent above the interest rate otherwise payable. The borrower challenged that clause on the same basis as it challenged the late fees, but the Court applied the same analysis and reached the same conclusion. In the MetLife case, the default rate was three percentage points higher than the contract rate. Consequently, without evidence presented to the contrary, a two percent “bump” in interest after default was found to be reasonable.

The note stated that the borrower had no right to prepay the loan without paying a prepayment premium. Further, the prepayment premium could also be charged in the event of an acceleration of the loan. All of the prepayment language was set forth in bold and was immediately followed with a space for the borrower’s initials, which was completed, “signaling agreement to those terms.” Under New Jersey law, a borrower does not have the right “to prepay a commercial loan, unless the documents afford that right.” According to the Restatement (Third) of Property: Mortgages, “[t]he primary purposes of these clauses is to protect the mortgagee against the loss of a favorable interest yield… .” Essentially, “prepayment fees are nothing more than liquidated damages clauses.” This does not mean that a lender can demand any level of prepayment premium. According to the Court, “[a] prepayment premium cannot be charged, for instance, if the prepayment is the result of a property having been taken by eminent domain” or “from destruction of the property by casualty such as fire and insurance proceeds are used to pay the loan.” It acknowledged contrary opinions in other states concerning whether a payment penalty could be charged after collection, but sided with the Restatement (Third) of Property and with “those authorities which permit collection of a prepayment penalty in the event of acceleration.” Even though “there is a certain ineluctable logic to the statement that payment after acceleration cannot be considered prepayment, [the Court perceived] no reason why the debtor should be relieved of the terms of the contract freely entered into.” The test of enforceability for a prepayment penalty is “reasonableness.” Again, the borrower presented no evidence that the prepayment penalty was unreasonable and the Court upheld the charge.

Under the Rules of Court, attorneys’ fees in foreclosure actions are to be set by a court in a foreclosure action on a sliding, percentage scale. Here, the borrower complained that the mortgagee’s counsel did not file an appropriate affidavit of services. Unfortunately for the borrower, the applicable Court Rule exempts tax and mortgage foreclosure actions from the affidavit requirement. The reason is that the Court Rule provides for a fixed, sliding scale. When comparing the fee actually awarded by the lower court to the sliding scale, the Appellate Division first subtracted separate fee awards that had been granted “in connection with motions in aid of litigant’s rights that the [mortgagee] had been forced to file.” After subtracting those fees as well as costs, the balance of the attorneys’ fees had been correctly determined by the lower court.


MEISLIK & MEISLIK
66 Park Street • Montclair, New Jersey 07042
tel: 973-783-3000 • fax: 973-744-5757 • info@meislik.com