Mortgagees Face Increased Penalties for Failure to Remedy Municipal Violations on New Jersey Properties in Foreclosure

by Blank Rome LLP

Consumer Finance Litigation

Effective July 14, 2014, New Jersey Assembly Bill A347 amended N.J.S.A. 46:10B-51, a statutory provision that allows municipalities to impose penalties on creditors for failure to remedy municipal ordinance violations.

Action items: As a result of the recent changes in New Jersey law, mortgagees and servicers should review their practices and procedures to ensure timely response to notices of municipal code violations on abandoned or vacant properties in foreclosure in New Jersey. Failure to promptly and fully remedy code violations will expose the mortgagee and servicer to increased penalties.

The statute applies to properties in foreclosure once a creditor has served the summons and complaint, and until the vesting of title in a third party, whether or not the creditor ever takes ownership or possession of the property. While the pre-amendment version of the statute significantly impacted creditors foreclosing on residential mortgages, the amendment broadens the power of municipalities to require creditors to maintain vacant properties in foreclosure. Under the amended statute, creditors will now be subject to the same fines and penalties as property owners for public nuisance violations on vacant and abandoned properties in foreclosure if the nuisance is not abated within a 30-day period. This applies even in situations where public funds are not expended.

The pre-amendment version of N.J.S.A. 46:10B-51 requires creditors to “notify the municipal clerk of the municipality in which the property is located” within 10 days of the filing of a foreclosure complaint that such action has been commenced against the property. The notice must contain specific information about the property, as well as contact information for a representative of the creditor to whom property maintenance complaints and code violation notices should be sent. Further, if the owner of such property subsequently vacates or abandons the property, prior to the vesting of title in a third party, the creditor must assume responsibility to maintain the property in accordance with all state laws and municipal ordinances, and bears liability for any nuisance or code violation. If such a nuisance or violation arises, the creditor must “abate the nuisance or correct the violation in the same manner and to the same extent as the title owner of the property, to such standard or specification as may be required by State law or municipal ordinance.”

The penalties (per violation) for violations of the pre-amendment version of N.J.S.A. 46:10B-51 are set forth in N.J.S.A. 40:49-5. If a violation is received, the penalty may include the following: imprisonment for a period not exceeding 90 days; a fine up to $2,000; or community service for a period not exceeding 90 days. Additionally, those convicted of and fined for a violation of the same ordinance within one year of the date of the previous violation are deemed “repeat offenders,” and they are subject to an additional fine to be calculated separately from the fine imposed for violation of the ordinance.

Under the pre-amendment of N.J.S.A. 46:10B-51, the penalties set forth in N.J.S.A. 40:49-5 were reserved for title owners to the property, and could only be imposed upon creditors if the municipality expended public funds to abate the nuisance. There was also no specific time period provided in the pre-amendment statute within which the violation had to be abated before penalties could be imposed (although the individual violation notices would specify a period of time, those time periods would vary from municipality to municipality). In other words, prior to the amendment, a municipality only had the authority to impose the same fines and penalties on creditors as those imposed upon property owners if the municipality expended public funds to abate the nuisance or correct the violation, which usually meant that several months had to pass with repeated unremediated violations before a creditor would face these penalties.

Under the amended statute, although the penalties themselves have not changed, the time and manner in which they can be imposed upon creditors has changed significantly. Municipalities can now impose the fines and penalties on creditors simply for failing to remedy the violation within 30 days of the notice from the municipality, regardless of whether the municipality expends public funds to abate the violation itself.

It is also noteworthy that the amended statute is unclear as to whether a creditor’s obligation to maintain vacant or abandoned properties continues even if a foreclosure action is later discontinued, but title does not vest in a third party. This situation most often occurs when a foreclosure action is dismissed on a vacant property, either voluntarily by the creditor or by the court due to lack of prosecution or deficiencies in the foreclosure filing. Since the statute does not provide for termination of the obligation other than when title vests in a third party, municipalities may be able to continue to hold creditors accountable for maintenance of these properties even after a foreclosure has been dismissed.

The current amendment to N.J.S.A. 40:49-5 is just the latest in a growing trend in enacting legislation designed to protect neighborhood economics and vitality. For example, on March 27, 2014, the New Jersey Senate introduced Bill 1884, which proposes to increase the maximum penalty for “continuing flagrant violations” to $4,000 per incident, instead of the current $2,000 fine limit. Although Bill 1884 has not yet passed, it highlights the increasing power given to municipalities, through legislation, to correct vacant property nuisances.

In addition to the requirements of N.J.S.A. 46:10B-51, mortgagees and servicers should be aware that each New Jersey municipality has its own individual requirements for maintaining vacant properties in foreclosure, which may vary. Therefore, when notified of a vacant property or a violation, creditors, their vendors, and attorneys must refer to the code of the specific municipality in which the property resides in order to determine the standard for remediation and future maintenance. Furthermore, although the statute refers only to a “creditor” as the responsible party, different municipal codes have varying and more expansive definitions of the responsible party, and may refer to other individuals and entities including owners, mortgagees, agents, lenders, and operators.

With the new penalties in place, and possible increased maximum penalties soon to come if Bill 1884 is passed, it will be of the utmost importance for creditors to closely and frequently monitor vacant properties in foreclosure, and to ensure outside vendors are properly assessing the occupancy status of the properties and conducting appropriate regular maintenance to keep the properties up to code. Additionally, creditors must immediately take steps to remedy any known violations within the 30-day period, and to prevent reoccurrence of the same violations, keeping in mind that fines may be imposed separately for each ordinance violated and for each incident. Failure to do so will result in additional “repeat offender” fines, which can add up to the tens of thousands of dollars for multiple offenses. For creditors with numerous properties facing violations, failure to properly attend to these issues could increase exposure to significant fines and penalties.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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