Transactions involving real estate in New York generally must be in writing and in recordable form in order to be enforceable. New York, however, also recognizes the long-standing equitable principle which allows lenders, in certain circumstances, to claim a right to what is known as an “equitable mortgage.” The concept is that to the extent a borrower intends that the property is to be held, given or transferred as security for a loan, a court can impose an equitable mortgage even if the paperwork evidencing the loan is not properly executed or recorded. This exception is only available in limited situations. Here are 3 key things borrowers and lenders should know about an equitable mortgages:
- There must be an express or implied agreement.In order for a court to find that an equitable mortgage exists, there must be an express or implied agreement that there shall be a lien on specific identified property. The party claiming the equitable mortgage must clearly establish that the borrower intended to grant the lender a security interest in the borrower’s property.
- An equitable mortgage allows a lender to enforce a loan against a borrower.This issue will generally only arise if a lender seeks to foreclose on its interest as a result of some breach of the loan terms by the borrower and realizes there is a problem with the paperwork. The lender must have jurisdiction over all property owners as foreclosure can only be granted against a party who is liable under the mortgage (whether the same is legal or equitable).
- An equitable mortgage can be found in a variety of situations.Some common instances when an equitable mortgage has been found to exist include:
- The legal (written) mortgage was not executed properly.Courts may recognize an equitable mortgage where technical or other errors were made in the paperwork or execution of the agreement.
- The lender paid the borrower the funds.In one case, a verbal agreement to place a mortgage on property which was never put into writing resulted in the Court finding that an equitable mortgage existed because the money was in fact paid to the Borrower.
- The lender filed satisfaction of the mortgage.In another case, a Lender which erroneously filed a satisfaction of mortgage in connection with a mortgage that had yet to been paid off was found to be an equitable mortgage holder.
- Some property owners did not sign the mortgage.In a recent case decided on August 8, 2018, the Appellate Division, Second Department inJPMorgan Chase Bank, N.A. v. Bank of America, et al. refused to dismiss a claim for imposition of an equitable mortgage against two (2) property owners who had not signed the mortgage documents. The mortgage had been signed by the third property owner and the funds represented by the mortgage were received. The Court found that it was premature to dismiss the claims against the non-signing owners because discovery had not yet been conducted on whether the non-signing owners intended that their property be used to secure the mortgage obligation.
This is not a complete list of all situations in which an equitable mortgage may be granted. If you have encountered any issues similar to those discussed in this article or wish to discuss the topic with one of our Real Estate attorneys, please contact us.