Eminent Domain FAQ

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Eminent Domain FAQs about Eminent Domain Condemnation Law.

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Click here to access a case which exemplifies this article's judicially established principle

The standard clause or clauses in every mortgage provide that the bank has the first lien or priority against any condemnation award. The clauses appear to be detailed, usually stating that the condemnation award is deemed “assigned” to the bank and further that the condemnation does not affect the bank’s right to enforce its mortgage and bond accordingly. If you read the typical mortgage clause, it would appear that in the event of a condemnation, it will collect out of the award both the principal of the award and interest at the rate set forth in the mortgage and mortgage bond.

For example, the condemnation clause seen in many mortgage instruments may be as follows:

“TOGETHER with all awards heretofore and hereafter made to the mortgagor for taking by eminent domain the whole or any part of said premises or any easement therein, including any awards for changes of grade of streets, which said awards are hereby assigned to the mortgagee, who is hereby authorized to collect and receive the proceeds of such awards and to give proper receipts and acquittances therefor, and to apply the same toward the payment of the mortgage debt, notwithstanding the fact that the amount owing thereon may not then be due and payable; and the said mortgagor hereby agrees, upon request, to make, execute and deliver any and all assignments and other instruments sufficient for the purpose of assigning said awards to the mortgagee, free, clear and discharged of any encumbrances of any kind or nature whatsoever.”

However, this is not as clear as it looks.

Under a series of cases from both trial and appellate courts, a bank’s interest rate to participate in the condemnation award is deemed automatically reduced to the statutory rate applicable to the condemnation award. The consequences are obvious. Assume that the bank’s interest rate is 9% or 10% (or whatever floating rate) and, of course, its default rate is usually substantially higher.

In respect to the condemnation award , all these rates are reduced to the statutory rate on theory that the land (previously the security) has now been replaced by the “condemnation res” and the bank may not participate in that condemnation award in an amount greater than the statutory rate which in New York State is currently 6% in local takings (e.g., takings by county, city, town and village) and 9% in state takings.

A case which exemplifies this judicially established principle of law is In re City of New York [Rockaway Water Pollution Control Plant] (Beach 104 St. Realty Inc./Doral Bank, Co-Claimant), Queens County Index No. 555/2007 (Rios, J., September 16, 2008), which can be accessed here. As the Court stated:

“A condemnor takes full title to land, free of all encumbrances and inconsistent proprietary rights (see Matter of County of Nassau [Gelb-Siegel], 24 NY2d 621, 626 [1969]; Copp v Sands Point Mar., 17 NY2d 291, 294 [1966]). Condemnation extinguishes all lien interests ... in the property taken (see Matter of County of Nassau [Gelb-Siegel], supra; Copp v Sands Point Mar., supra at 293; Muldoon v Mid-Bronx Holding Corp., 287 NY 227, 231 [1942]; Matter of County of Rockland [Kohl Indus. Park Co.], 172 AD2d 607 [1991]). Substituted in the place of a ... lien is an ‘equitable lien ... against the condemnation award to the extent of each lien and interest thereon as of the date title vested’ (County of Rockland [Kohl Indus. Park Co.], supra at 609; Matter of County of Nassau [Gelb-Siegel], supra; Matter of Barber [State Comptroller], 274 App Div 712 714 [1949]). This is so because the condemnation award takes the place of the land (see Fischer v MMRR Constr. Corp., 204 AD2d 681 [1994]),” (Matter of Mill Cr. Phase 1 Staten Is. Bluebelt Sys., 38 AD2d 665 [2007], revd on other grounds 10 NY3d 898 [2008])...”

The bank’s condemnation clause was, as noted, the standard – what appeared to be quite detailed – condemnation clause. Yet, the bank’s interest rate, including the default rate, was for purposes of participation in the condemnation award reduced to the statutory rate of 6%. Further, where the bank has “elected” to formally make a claim in the condemnation, it may have been deemed to waive any claim for the so-called deficiency in the interest rate under the personal guarantees (if any exists.)

The Court in In re City of New York [Rockaway Water Pollution Control Plant] went on to state:

“A mortgagee of premises taken by eminent domain which does not seek to enforce the obligation of the mortgage note (cf. Copp v Sands Point Marina, Inc., 17 NY2d 291 [1966]), or other personal agreement to pay the amount of the mortgage debt, but instead files a claim, retains an equitable lien on the condemnation award to the extent of the mortgage indebtedness (see Fliegel v Manhattan Sav. Bank, 296 NY 214 [1947]; Muldoon v Mid-Bronx Holding Corp., 287 NY 227 [1942]; 362 Washington St. v Peninsula Natl. Bank, 53 Misc 2d 499 [1967]). Under such circumstances, the mortgagee is deemed to have chosen to satisfy its loan out of the payment from the condemning governmental authority (see Muldoon v. Mid-Bronx Holding Corp., 287 NY at 231; 362 Washington St. v Peninsula Natl. Bank, 53 Misc 2d at 501). Having so chosen, the mortgagee is permitted to obtain an award, but is restricted to take it with such interest only as the sovereign is required by statute to pay to the owner from the date of the vesting of title (see Fliegel v Manhattan Sav. Bank, 296 NY at 218), and may not collect more interest under an obligation which no longer is in existence (see 362 Washington St. v Peninsula Natl. Bank, 53 Misc 2d at 501)....”

The bank can “elect” not to file a claim and to proceed on the bond or guarantee directly against the mortgagor, but this is really not what the bank finds as an attractive option. While personal liability or guarantees may have value, the bank has been looking at the property as the primary security. Collecting on the bond personally or the guarantee is often an unsatisfactory exercise. It’s the property that provides the bank with the security comfort.

Therefore, under the typical bank mortgage condemnation clause, the bank is on the “horns of a dilemma” in respect to the interest rate. The bank certainly wants to get the condemnation award and whatever it “elects” to do, it will receive the principal, but at the same time wants to realize its full contractual interest rate. However, under the standard condemnation clause, should it choose to file a formal claim, it’s now in the position of having effectively reduced its interest rate to the statutory rate and, if it really does absolutely nothing and makes no election – sitting passively by – waiting for the condemnation award to be processed, the amount of the award will only carry the statutory rate. The bank is put in a position, one way or another, of looking to the mortgagor to try and get the difference. Yet, there is a simple solution to the problem. If, as noted, the condemnation clause was more “specific”, then it would not be put in a position where its election to participate or not participate in a claim would impair its position.

Interestingly, most of the condemnation clauses – standard or otherwise – really do not require any radical surgery to solve the problem. A few express sentences added to the condemnation clause to the effect that the bank is entitled to recover out of the condemnation award the principal plus its contract rate – even if it’s higher than the statutory rate – would probably resolve the issue.

For questions or to discuss items presented in this topic, please contact Saul Fenchel.

1 Assume a total take. A partial take does create a further complication, but the applicable principle is the same.