Before purchasing any type of real estate, you should be fully informed about any mortgages or other encumbrances on the property. Not all liens on real property are treated the same under New York law. It is therefore important to understand which debts are considered a priority before you are potentially stuck with multiple mortgages.
Court of Appeals Rules Consolidated Mortgage is “First Mortgage of Record”
The New York Court of Appeals recently clarified the priority of liens as applied to condominium sales. The specific issue in this case was whether two mortgages consolidated into a single mortgage had priority over unpaid commons charges assessed by the condominium’s board of managers.
In July 2000, a New York City condominium owner took out a $54,000 mortgage from a bank. In 2001, the bank granted a second mortgage on the condominium for $38,000. At the time of the second mortgage, the owner and the lender agreed to consolidate the two loans into a “single mortgage lien” against the apartment for $92,000.
Seven years later, the condominium’s board filed its own lien against the apartment for “unpaid commons charges.” The condo was subsequently foreclosed upon, and a buyer purchased the apartment at auction. The purchase was subject to the “first mortgage of record against the premises.”
The purchaser subsequently sued the mortgage lender, seeking a judicial declaration that he was only liable for payment of the original $54,000 mortgage and not the consolidated $92,000 mortgage. The purchaser argued that New York real estate law prioritizes the payment of the condo board’s lien over the second bank mortgage. Specifically, the law states a condo board lien has priority over all other liens, except, as applicable here, the “first mortgage of record” on a condominium unit.
The lender replied the consolidated mortgage was the “first mortgage of record” and therefore the plaintiff was liable for the whole $92,000. The New York Court of Appeals agreed. Affirming prior decisions by both the Richmond County Supreme Court and the Appellate Division, Second Department, the state’s highest court said it made sense to treat both mortgages as a single loan because “there was no intervening lien at the time the loans were consolidated.” As the court noted, the condominium board’s lien did not come until seven years after the original owner took out the second mortgage. Accordingly, the consolidation “did not interfere with any rights of the condominium board” under state law.
The Court went on to explain that allowing a condo board lien to have priority over an older consolidated mortgage would adversely affect the ability of owners to refinance their properties, which would defeat the state legislature’s intentions. It would also be impractical: “If this Court were to hold that the consolidation agreement did not qualify as the first mortgage of record, banks and condominium owners would simply take additional steps to satisfy the original mortgage, take out a new mortgage, and pay the additional fees required to achieve precisely the same result.”