USA – NEW JERSEY Law and Practice Contributed by: David Freylikhman, Cory Mitchell Gray, David Jensen and Jody Saltzman, Greenberg Traurig LLP
timeframe may enable a borrower to attempt to seek alternative financing or an amicable resolution of the dispute between it and the lender. Once a lender elects to commence an enforcement action, there is nothing it needs to do to perfect, create or enhance the priority of its mortgage. New Jersey is a race-notice state and, therefore, once a mortgage is recorded, its priority is established. Within the foreclosure process, there are steps that a lender needs to take to ensure that the sale of the foreclosed property extinguishes any junior liens. In that regard, New Jersey law requires that a foreclosing lender con - duct a title search and certify to the court that such a search has been performed, and that all junior lienors and persons to whom notice is required have been named in the foreclosure action. The interests of the junior lienors named as defend - ants in the foreclosure action and any other interests that arise after the recordation of a lis pendens in connection with the foreclosure action will be extin - guished through the foreclosure process. Counsel for the foreclosing lender will also file a lis pendens in the county where the property is located to ensure that any new lienors cannot interfere with the foreclosure and will be bound by its outcome, even if not a party thereto. Real estate taxes, municipal water and sewer charges, and certain environmental liens will always have priority over a mortgage, regardless of when such charges are imposed. 3.7 Subordinating Existing Debt to Newly Created Debt A lender entitled to priority on its mortgage may agree to subordinate its priority to a subsequent mortgage lender’s mortgage through a subordination or post - ponement agreement. New Jersey recognises the doctrine of equitable subordination. Under this doctrine, a mortgagee who negligently accepts a mortgage without knowledge of intervening encumbrances will subrogate to a first mortgage with priority over the intervening encum - brances to the extent that the proceeds of the new mortgage are used to satisfy the old mortgage. This provides the new lender with the same priority as the old lender. Please note that, if the new lender has
actual knowledge of the prior encumbrances, it is not entitled to the priority described. 3.8 Lenders’ Liability Under Environmental Laws Lenders in New Jersey may be exposed to environ - mental liability for hazardous substances affecting their collateral under federal and state laws. However, New Jersey has created “safe harbours” for lenders which, in general, shield lenders if they act properly under the law. New Jersey law provides that, if a lender does not participate in the management of a facility, it is not deemed an owner and, therefore, not the discharger of hazardous substances. A lender is not deemed to be involved in management if it responds to an environ - mental issue and remediates it or directs its borrower to do so, nor is it required to perform an environmental inspection prior to making a loan to avail itself of this safe harbour. In addition, taking title to the property after a foreclosure sale with the intention of selling it in order to realise on the collateral falls within the safe harbour. 3.9 Effects of a Borrower Becoming Insolvent If the borrower becomes insolvent and is the debtor in a bankruptcy proceeding, any previously commenced enforcement actions will be subject to the automatic stay of the Bankruptcy Code. However, provided that the mortgage was properly recorded and there are no defects in the mortgage itself, the priority of the lender’s mortgage will remain intact. Throughout the pendency of the foreclosure action, the property will typically be operated by a receiver, if requested by the lender. Until ten days after the actual sheriff’s sale of a prop - erty ordered to be sold pursuant to a judgment of fore - closure, the borrower retains its equity of redemption and can regain control of the property by paying off the balance of the mortgage loan, together with all costs, attorneys’ fees and interest as calculated in accordance with applicable law. 3.10 Taxes on Loans New Jersey does not currently have any existing, pending or proposed rules, regulations or require -
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