And If The Foreclosed Property Is Damaged After The Auction But Before Closing?


15 January, 2022


Mortgage Lender and Servicer Alerts

Fortunately of course, such a thing does not occur every day, but it can happen.  Among the mishaps are initiation of a condemnation, fire, flood, cesspool collapse, vandalism, among any number of others.  It is a dilemma.  Who pays?  What happens to the transaction?

The shortest answer is that a statute addresses this [GOL § 5-1311] so that depending upon the amount of the damage, there is either an abatement in the purchase price or a refund of the bid deposit.  Or, as a new case reminds [Money Source, Inc. v. MEVS, 68 Misc.3d 238, 129 N.Y.S.3d 643 (Sup. Ct. 2020)] it will be the bidder’s responsibility if the terms of sale so direct.

All this can sometimes be clouded by the elusive status of title from the moment the hammer falls at the auction sale until the referee delivers the deed at a closing, usually some 30 or more days thereafter.

Although title companies certify title in a referee the moment a judgment of foreclosure and sale is entered, that appears to be the practice because there is no public record yet to disclose in whom title reposes.  That will only occur after a referee’s deed is delivered and recorded.  Believing that ultimately the borrower/owner’s title will be divested, title companies create this fiction to fill what would otherwise be a vacuum.  In the end, the referee is a mere conduit, not an owner.

So who is the owner of the property at the moment of the auction sale?  At least in defining the nature of title, case law is clear that until the conveyance of the property is completed by delivery of the deed, the successful bidder at the foreclosure sale is possessed of equitable title to the premises (but not legal title).  [See, inter alia, Hepworth v. Manetto Holding Corp., 262 A.D. 877, 28 N.Y.S.2d 526 (2d Dept. 1941); Norwest Mortgage, Inc. v. Brown, 35 A.D.3d 682, 830 N.Y.S.2d 158 (2d Dept. 2006)]

Returning to basic premise of this exploration, because the foreclosing plaintiff will be exposed to either reducing he bid price or refunding the bid deposit should the property be damaged prior to the actual closing of title, consideration should be given to shifting the responsibility by provision in the terms of sale.

In the recent case, where that goal was accomplished, the effective language was:

“Purchaser assumes all risk of loss or damage to the premises from the date of sale until the date of closing and  thereafter.”

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2022), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.