North Carolina Land Condemnation: What if There is a Mortgage?

Under the power of eminent domain, the State of North Carolina, local governments and even private parties like utility companies can seize private land for public use as long as "just compensation" is paid for taking the land. Eminent domain proceedings are generally called condemnation proceedings or sometimes just "takings."

The eminent domain process can be more complicated if there is a mortgage on the land that is being taken. Generally, a mortgage is the legal document that causes the land to be collateral for the loan. If the landowner does not pay the loan, the mortgage allows the lender to seize the land to pay off the loan. When an eminent domain proceeding is undertaken, the government (or private party) is required to notify the lender of the proceedings (in addition to the landowner and all others who might have an interest in the land).Mortgage documents also contain provisions that specify what is to be done if there is a condemnation of the land, in whole or part. Thus, if there is a mortgage, legally, the lender will have a claim against the "just compensation" paid for the taking of the land.

How Does it Work?

Other than giving the required notice, there is no involvement with a mortgage holder by the government or private party when eminent domain is used to take land. The condemnation process is slightly different for government agencies and for private parties. But for either process, at some point, the "just compensation" is paid in a lump sum and deposited with the local county Clerk of Court. From that point, the mortgage company and the (former) landowner are left to argue over the division of the "just compensation."

In practice, the mortgage holder and the owner begin negotiations. If your North Carolina property has been condemned or if a taking of your land is possible, it is important to seek the advice and legal counsel of experienced North Carolina eminent domain attorneys like those at Arnold & Smith, PLLC. This is even more important if there is a lender involved. Landowners need trusted legal assistance when negotiating with mortgage lenders.

Start With Reading the Mortgage

The first place to begin is with a review of what the mortgage says about condemnation proceedings. Many mortgages will simply state that any funds paid as a result of condemnation must be paid to the lender. Other mortgages are less extreme and allow for the landowner to retain part or all of the "just compensation" under some circumstances. Usually, those circumstances involve a partial taking of the land and where the "just compensation" paid is small compared to the total loan.

To explain further, look at this sample partial condemnation provision that one might see in a mortgage:

"Condemnation Proceeds. HOME OWNER/BORROWER hereby assigns, transfers and sets over unto LENDER the entirety of any proceeds of any amount paid for any of the MORTGAGED PROPERTY taken or damaged under the power of eminent domain or by condemnation , unless such taking or condemnation does not cause a material diminution in the value of the MORTGAGED PROPERTY."

As can be seen, the language in this mortgage automatically gives over to the lender all of the "just compensation" paid if there is a condemnation. Typically, mortgage condemnation clauses will be quite lengthy and will specify conditions where a taking is not deemed to have a "material diminution" of the value of the land. Usually, these conditions involve a utility or other type of easement that does not impact use of the land for its current purposes. For example, if the land is used as a personal residence, a partial condemnation to run power lines to the house or even along the back of the property will not generally interfere too much with the house being used as a personal residence. However, that is not necessarily true if the front lawn is condemned for the widening of the local road.

Various Scenarios

Typically, how a mortgage lender situation is resolved depends on several factors. These include:

  • How much was paid in "just compensation" -- sometimes, lenders can be convinced to allow the landowner to keep a small payment for a partial condemnation
  • How does the "just compensation" paid compare what is still owed to the lender -- if the amount is small compared to the loan, sometimes lenders can be convinced to waive turnover of condemnation proceeds
  • Whether the takings was partial or whole -- if the takings was complete, there will be no waiver of payment to the lender; the lender will want a full payoff
  • Whether the "just compensation" paid is sufficient to pay off the loan -- again, the lender will want full payment, but sometimes can be convinced to take less to allow the landowner to have some compensation
  • Whether the landowner will litigate over the amount of compensation paid -- landowners are often initially given less than the full market value of the land taken and landowners can litigate the issue
  • Whether any improvements (like buildings) were destroyed in a partial or temporary taking and must be rebuilt -- often, lenders will require the condemnation proceeds be used to restore the improvements
Contact Arnold & Smith, PLLC. Today

For more information, and to schedule a confidential consultation with experienced and dedicated property law attorneys in Charlotte, contact Arnold & Smith, PLLC. Use our “Contact” page or give us a call at 704.370.2828. We handle land use, zoning and condemnation legal matters in Mecklenburg County and elsewhere in North Carolina. We have offices in Charlotte, Lake Norman, and Union County.