The mere mention of eminent domain makes many New York business and property owners uneasy. Government and non-government entities alike can attempt to “take” other people’s property through legal proceedings under New York’s Eminent Domain Procedure Law. This usually leaves the existing property owner crying foul, but all too often mortgage lenders feel the ripple effect of “condemned” property that serves as security for a mortgage loan. When a mortgaged property is the subject of an eminent domain condemnation, the lender may be left without its sole negotiated-for recourse remedy—foreclosure on the property.

To avoid a potentially disastrous situation where a lender’s recoupment of its loan through standard commercial foreclosure is impossible due to the property’s eminent domain condemnation, lenders should mitigate their risks by ensuring that their mortgage agreements contain provisions not only assigning condemnation amounts to the lenders, but also requiring a seat at the table of any condemnation negotiations between the condemning authority and the property owner. A well-drafted mortgage agreement should make plain that, in the event of an eminent domain condemnation, the borrower must repay the full amount of the loan to the lender, regardless of the amount paid for the taking of the property.

Eminent Domain in New York

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