Woodlake at King’s Grant Condominium Association, Inc. v. Coudriet and Mesy. What it Means and What Associations Should Do Going Forward
It’s common knowledge that Burlington County Chancery Judge Karen L. Suter has not been receptive to Associations’ applications for appointment of rent receivers. This has been true even when a unit is abandoned, vacant and worth less than the balance of the mortgage. Nevertheless, we believe that Judge Suter and New Jersey’s other Chancery Judges will, in the proper circumstances, continue to grant Associations’ applications for appointment of rent receivers.
In Woodlake at King’s Grant v. Coudriet and Mesy (decided April 1, 2014), New Jersey’s Appellate Division reviewed two of Judge Suter’s decisions denying Woodlake’s motions for appointment of rent receivers where the units were abandoned, vacant and apparently worth less than the balance of the mortgage. The Appellate Division upheld Judge Suter’s denials.
We did not participate in the Woodlake case. However, we do not believe that Judge Suter has anything against associations nor do we believe that the Woodlake decision should inhibit Chancery Judges from granting Association’s future rent receiver applications.
In Woodlake the Appellate Court noted that “The Association has not demonstrated that defendants have an affirmative obligation to rent their respective units…”; “[the Association has not demonstrated]…any authority…to rent those units to new tenants”; “Nor have we been presented with any indication that defendants misappropriated rents”; “[The Association has not provided] any other agreement between the parties [that] provide[s] for the appointment of a rent receiver” and “…the Condominium Act does not expressly authorize such relief…”. However, nothing in that laundry list is determinative of whether or not a rent receiver should be appointed on an Association’s application when a unit is vacant and abandoned. At issue is the Court’s power, not the association’s power. Chancery courts have the inherent power to prevent waste, mitigate fire risk, mitigate vandalism risk and prevent squatting.
The decision is left to the broad discretion of the Chancery Judge. Arguably, the County Chancery Judge has the broadest powers of any judge in the judicial system (the late Judge Alexander Lehrer once said “Mr. McGovern, in this courtroom, I am king.” He then offered to trace the history of the Chancery Court’s equitable powers back to the kings of England). Chancery Judges have the power to grant equitable relief – a power broader and more flexible than Law Division Judges.
Chancery Judges ask themselves: “Does this seem right?”, “If I deny the requested relief, will the applicant be irreparably harmed?”, “If I grant the requested relief will another party or, worse yet, someone who has not had the opportunity to be heard, suffer greater harm than the applicant?”
Beyond the laundry list noted above, the Woodlake Appellate Court discussed rent receivers in the context of cases involving banks attempting to have rent receivers appointed against mortgagors. Early in my legal career I represented banks and was involved in a number of hotly contested cases involving a bank’s right to rents.
The Woodlake Appellate Court did not plumb the distinctions between rent receiver applications in the bank-mortgagor context and rent receiver applications in the association-abandoned unit context. In the bank-mortgagor context, typically the bank has lent money to the mortgagor to purchase the property (perhaps an apartment building, office building etc.). If the mortgagor defaults, the bank attempts to collect the rents via a rent receiver so that its loan may be repaid.
Courts look at such relief as extraordinary for a number of reasons, for example: the right to collect rents and proceeds generally follows ownership and possession rather than lienholder status, appointing a rent receiver may put the mortgagor out of business if the mortgagor’s business is real estate investment and appointing a rent receiver may put the mortgagor out of an operating business if the mortgagor’s business is a (or the only) tenant in the financed real estate. Courts also consider whether the lender is “adequately protected” by the value of the property. Judges ask: Is there an “equity cushion” such that the value of the property exceeds the mortgage sufficiently to protect the bank’s loan amount plus amounts, such as taxes, insurance, security etc., that the bank may have to continue to advance.
The reasons judges are cautious in appointing rent receivers in the bank-mortgagor context do not however apply in the association-debtor context where the unit has been abandoned and is vacant. In the association-debtor context, where the unit has been abandoned and is vacant, waste/fire/vandalism/squatters and possible impacts on third parties are the primary concerns – the debtor has already walked away from the unit.
Waste/fire/vandalism/squatter issues weigh heavily in favor of granting an association’s request for appointment of a rent receiver. However the “possible impact on third parties” prong could still be problematic. In Woodlake the mortgage company was apparently not a party to the suit or on notice of the rent receiver motion. Further, it also seemed that the mortgage company may have been proceeding expeditiously with its foreclosure and was close to completing the foreclosure process. Although speculation, these two facts alone appear sufficient to support Judge Suter’s denial of the rent receiver application and the Appellate Division’s affirmation of Judge Suter’s decision.
Judge Suter, having been New Jersey’s Chief of Banking and Insurance Operations from 1998 to 2000 and Commissioner of New Jersey’s Department of Banking and Insurance from 2000 to 2001 is aware of the fact that banks, via their security instruments, often take an interest in rents and proceeds. Therefore, she may feel that, even though the association is a junior lien holder and cannot foreclose the bank’s interest, in the context of a rent receiver motion, the bank is entitled to be a party to the action or, at a minimum, is entitled to have notice of the rent receiver application. Further, Judge Suter may also feel that, in cases where bank foreclosure is imminent, the administrative detriment to the bank of putting a tenant in the unit outweighs the brief benefit to the association.
In any case, we feel that Woodlake did not contribute meaningfully to the body of case law addressing rent receiver applications. Rather, it reaffirmed the power that Judge Suter and the other Chancery Judges already had and have exercised regularly throughout the recent economic slump. Whether or not a rent receiver is appointed with respect to an abandoned and vacant association unit depends on the facts.
It appears that, going forward, the bank should be put on notice of any association rent receiver application and that an Association should think twice before applying for a rent receiver where a bank is diligently pursuing its foreclosure action and completion of the foreclosure is imminent. Associations should still however look to rent receiver applications as a valuable collection tool and not forget that banks may also be liable as mortgagees in possession.