Understanding New Regulations Surrounding Zombie Properties

Slaying (or Defraying) the Zombie Scourge

On June 23, 2016 a bill (Senate Bill S8159 Assembly Bill A10741) was signed by Governor Cuomo and made law, covering multiple items, including several provisions dealing with real property maintenance and foreclosures. The press releases from the Governor and others in his administration tout the law as an effort to preserve the American Dream and to combat the scourge of zombie properties.     

When the housing market collapsed and the recession hit, many New Yorkers suffered.  This unfortunate economic reality was compounded by the presence of many high-cost or sub-prime loans in the market.  As a result of the combination of these, and many other factors, the number of foreclosures in New York State dramatically increased.  In an effort to stem the growing tide of foreclosures, New York passed a series of laws, radically changing the foreclosure process in New York.  While the new laws dramatically slowed the already lengthy foreclosure process in New York, they had the unintended consequence of stalling many foreclosure cases in the courts.  While cases dragged on in our courts for years, many homeowners chose to walk away from their properties, especially when the amount due the lender far exceeded the property value.  These properties, now abandoned, remained the legal property of the homeowner; however they were no longer occupied or being maintained.  Such properties are referred to as “zombie properties.”

Abandoned and ill-maintained properties are by no means a new phenomenon.  The only difference we now face is the scope of the problem and the question of who should bear the cost of maintaining these properties.  Up until this point, the law was clear that a property owner was responsible for their own property.  If an owner failed to maintain their property and it became a nuisance, the government had the authority to step in to remedy the problem and then charge the owner for the cost.  Given the volume of abandoned properties and the current penchant for blaming the banks, the new legislation passed to combat this problem generally shifts that cost to lenders holding defaulted first mortgage liens on vacant, abandoned properties.  Although the homeowners also retain responsibility, it is likely that municipalities will look to the banks to maintain vacant and abandoned properties.

The changes enacted, which become effective on December 20, 2016, include new provisions establishing a duty to maintain vacant abandoned residential real property, requirements for inspections, establishment of a vacant property registry and penalties for noncompliance.  This legislation extends the inroads previously made by the enactment of RPAPL § 1307 in 2009 (which imposed a duty on the plaintiff, in certain circumstances, to maintain a property once they had obtained a judgment of foreclosure and sale).  Under the new law the responsibility will arise from the mere presence of the defaulted mortgage lien on vacant abandoned residential real property, not from the entry of the judgment of foreclosure and sale.  This new law alters the concepts of legal responsibility, imposing costs and duties on a lienholder if the property which secures the loan becomes vacant and if the borrower defaults on the loan. 

Other provisions in the new legislation include changes to the 90 day pre-foreclosure notice, changes to the Help For Homeowners notice served with the Summons and Complaint, changes to the settlement conference procedures (including standards for good faith negotiations and penalties for failure to meet those standards), establishing an expedited foreclosure process for abandoned properties and changes requiring that the foreclosure sale take place within 90 days of the Judgment of Foreclosure and that the property be placed on the market within 180 days of acquiring the foreclosure deed. 

Although this new legislation may result in more lenders paying closer attention to the condition of the properties securing their loans, the reality is that most responsible lenders already inspect and secure abandoned properties.  To fully address the issue of zombie properties the glut of pending cases must be moved though the foreclosure process to a final resolution.  Acknowledging this fact, the new legislation does provide a mechanism to seek an expedited judgment of foreclosure on vacant and abandoned residential property.  It remains to be seen whether lenders will avail themselves of this process and whether the courts will be receptive to such motions.

John K. McAndrew, Esq. is a Partner in the firm’s Secured Lending and Financial Recovery Department.  He can be reached at 585-987-2885 or [email protected]