Last year, we told you about a decision from the Appellate Division holding that a condemning authority does not have to engage in bona fide negotiations with a mortgage holder that has obtained final judgment on the property that the authority is seeking to condemn. Click here for the prior post. The Supreme Court has now affirmed the Appellate Division’s decision.

Under New Jersey law, before condemning real property, a condemning authority must, among other things, engage in bona fide pre-litigation negotiations with the party that "owns title of record to the property."  N.J.S.A. 20:3-6. Prior case law had made clear that this limitation meant that a condemning authority was not required to negotiate with a leaseholder or some other party that might have an "interest" in the property, but was instead required to negotiate only with the record title owner. In Borough of Merchantville v. Malik & Son, LLC, however the Supreme Court was faced with a slightly different question -- whether a municipality needs to negotiate with an entity that held the mortgage on the underlying property, had obtained final judgment of foreclosure against the title owner, and was on the verge of taking the property to sheriff’s sale. The Supreme Court ruled that it does not.

Malik & Son involved a 54-unit apartment building in Merchantville, New Jersey that had been designated by the municipality as an area in need of redevelopment. The property was owned by Malik & Son, LLC (“Malik & Son”) and was subject to a mortgage loan. Unfortunately, Malik and Son defaulted on the mortgage, the lender filed a complaint to foreclose, and final judgment of foreclosure was eventually entered on behalf of the lender. The day after final judgment was entered, the lender assigned all of its rights and interests in the property (including the final judgment of foreclosure) to LB-RPR REO Holdings, LLC (“LB”).

LB is a redeveloper of distressed property. After it acquired all of its predecessor’s interests in the property, it had a rent receiver appointed and made “substantial repairs to the building.” It also sought, and the court entered, an order that prohibited Malik & Son from selling the property with LB’s express approval.

While all of this was happening, the municipality was pursuing a plan to redevelop the property.  As part of this process, it had the property appraised and offered to purchase the property from Malik & Son for what the municipality considered to be fair market value. Malik & Son refused the offer because it would not have been enough to satisfy its debt to LB. The same day that Malik & Son rejected the municipality’s offer, LB’s counsel contacted the municipality and, among other things, informed the municipality that LB had obtained final judgment of foreclosure and that a sheriff’s sale had already been scheduled. LB’s counsel further expressed its interest in meeting with the municipality to discuss reasonable compensation for the property.

Needless to say, this meeting never took place. Instead, the municipality filed a declaration of taking and verified complaint in condemnation. LB moved to dismiss, arguing that the municipality failed to engage in bona fide negotiations with both Malik and Son and LB prior to seeking condemnation. The trial court rejected this claim, holding that the plain language of the relevant statute only required the municipality to negotiate with the record owner of the property. The Appellate Division affirmed.

The Supreme Court also affirmed. It first noted that foreclosure does not extinguish a mortgagor’s interest in the encumbered property. Rather, the mortgagor maintains the right to redeem its interest – i.e., to “reassert complete fee simple ownership of the property” – by paying the outstanding debt in full. This right exists, more or less, up to the point that a sheriff’s deed is issued following a sheriff’s sale. As a result, the Court held that, even after final judgment of foreclosure is entered, the mortgagor remains the party “holding the title of record” until its right of redemption is extinguished by the issuance of a sheriff’s deed.

The Eminent Domain Act, N.J.S.A. 20:3-1 -47, only requires a condemning authority to enter into bona fide negotiations with the “condemnee holding title of record.” Based on its initial conclusion, the Supreme Court held that, at the time the municipality in Malik & Son made its offer, Malik & Son was the only party “holding title of record,” therefore it was the only party with which the municipality had to negotiate.