Lenders are often faced with a dilemma when dealing with property that is in foreclosure and has been abandoned by the borrower. A lender must, under New Jersey law, maintain the property "to such standard or specification as may be required by state law or municipal ordinance." Also, the lender has an obvious interest in protecting the value of its collateral. But the lender does not want to take "possession" of the property and be deemed a "mortgagee in possession," because that would impose upon the lender the duty of a "provident owner," which includes the duty to manage and preserve the property, and which subjects the lender to liability for damages to the property and damages arising out of torts that occur on the property. Unfortunately, the point at which a lender takes "possession" of property is not entirely clear. I have written about this before, and the Appellate Division's recent opinion in Woodlands Community Association, Inc. v. Mitchell provides some additional guidance, which should be helpful to lenders.

In Woodlands, defendant was the assignee of a note and mortgage related to a unit in plaintiff's condominium development. The unit owner defaulted on the loan and vacated the unit. At the time, the unit owner was not only delinquent on his loan payments, but also owed "substantial sums" to the association for "unpaid monthly fees and other condominium assessments." After the unit owner vacated the unit, defendant changed the locks and winterized the property. (As the Appellate Division noted, "[w]interizing entails draining the pipes, turning off the water and setting the thermostat for heat to protect the pipes.") After the unite owner vacated the unit, plaintiff sued him to recover the delinquent fees. It later amended its complaint to include the lender, "alleging that [[the lender] was responsible for the association fees as it was in possession of the property."

Both parties moved for summary judgment. The trial court granted plaintiff's motion, holding that defendant was a mortgagee in possession and therefore was liable for the maintenance fees. On the key of issue of what it meant to be in "possession" of the unit, the trial court held as follows: "[D]efendant held the keys, and no one else [could] gain possession of the property without [defendant's] consent. This constitutes exclusive control, which indicates the status of mortgagee in possession." Defendant appealed.

The Appellate Division reversed the trial court. It began by reviewing the law governing mortgagee's in possession. It stated that, "[a]fter default by a [borrower] on property, the lender or its assignee has the right of possession, subject to the mortgagor's equity of redemption." (The "equity of redemption" refers to the right of the borrower to "redeem" the mortgage by paying it in full.) However, the Appellate Division further stated that the lender is "not the owner of the property unless there is a foreclosure and sale of the premises to the [lender]." If a lender is determined to be a mortgagee in possession, prior to becoming the owner of the property, then the lender is "liable for delinquent condominium common charges, which had accrued against the property's legal owner, for services furnished during the [lender's] possession and control of the premises."

Determining whether a lender is a mortgagee in possession requires a case-by-case analysis, which is focused on determining "whether or not possession and management of the premises have been undertaken by the [lender]." In Woodlands, the Appellate Division discussed a number of prior cases in which a lender was deemed to be a mortgagee in possession. In one of those cases, the lender took over the collection of rents from the tenants of the underlying property, and was paying the bills for the property and making repairs to the property. In another case, the lender rented out the units of the underlying property and was collecting rents on them. In both of these cases, the courts held that the lender was a mortgagee in possession because it had "take[n] out of the hands of the [lender] the management and control of the estate."

By contrast, in Woodlands, the Appellate Division held that the lender "[had] not occupied the unit, [was] not collecting rents or any other profits, nor [was] it making repairs." It further held that the lender's "actions of winterizing the property and changing the locks were [not] the equivalent of the multitude of actions and responsibilities undertaken by the [lenders]" in the prior case law it discussed. As a result, the Appellate Division held that the lender was not a mortgagee in possession and was not responsible for the unit owner's delinquent fees or assessments.

The Appellate Division rejected the argument, adopted by the trial court and advanced by plaintiff on appeal, that "the sole act of changing the locks renders [a lender] a mortgagee in possession as the action demonstrate[s] that no one else [can] enter the unit without the consent of [the lender], thus conferring upon it exclusive control." In doing so, however, the Appellate Division acknowledged that the "use of the word 'possession' in the designation 'mortgagee in possession' is somewhat misleading." It indicated that control and management are more descriptive of what it means to be a mortgagee in possession than actual possession. "Indicia of control and management include elements of possession, operation, maintenance, use, repair, and control of the property such as paying bills or collecting rents." In Woodlands, the Appellate Division held that the "minimal efforts" taken by the lender did not demonstrate sufficient control or management to justify deeming defendant to be a mortgagee in possession. Ultimately, the Appellate Division held that "defendant . . . [was] not benefiting from the limited actions it [took] to secure its collateral; it [was] simply protecting its rights."