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Lender Liability: Mortgage's Liability for Injuries Suffered on the Mortgaged Premises

Introduction

At some point, most Americans buy a house. Most cannot afford to pay cash, and so they take out a loan and grant the lender a mortgage on the property. The mortgage gives the mortgage holder, also known as the mortgagee, certain rights to foreclose on the property in the event the loan is not repaid. In today's litigious society, people often discover they have become liable for more than they bargained for, and many mortgagees worry that holding the mortgage on a property may make them liable to persons who are injured while on the property. Mortgagees, however, are generally not liable for injuries suffered on the mortgaged property unless they actually control the property.

Mortgagee's Liability for Injuries Suffered on the Mortgaged Property

Let us assume a certain property owner has decided to build a swimming pool in his backyard. Being thrifty, he elects to dig the pool himself rather than hire a contractor. Anticipating his success, he sends out party invitations to his neighbors so he can show off his new pool. However, the work progresses more slowly than expected, and when the big day arrives the homeowner has the hole for the pool dug, but nothing else. In addition, the hole is difficult to see because of the layout of the yard and because it is partially hidden by shrubs. Sure enough, the property owner's next door neighbor falls into the hole and breaks his leg. A lawsuit will almost certainly be filed against the property owner, but what liability does the mortgagee have for the injury?

Under these circumstances, the answer is very little. The property owner is liable because the law imposes certain duties on property owners to protect those they invite on their property. These duties are imposed on property owners for two distinct, but related, reasons. The first is that property owners who invite others on their property have a duty to exercise some degree of care to make the property safe for those persons they invite. The second is that the property owner, having chosen to invite someone over, also presumably has the responsibility to do whatever is necessary to ensure that the property is safe. If the property owner fails to keep the property in a safe condition, it is only fair that he be liable for this failure. However, because a mortgage does not give the mortgagee either the right to control access to or to perform work on the mortgaged property, these same rationales for liability do not apply to the mortgagee.

In the absence of default, a mortgagee generally has no control over who does and who does not have the right to enter the mortgaged property. Most mortgages provide that if the owner of the property who has taken out the mortgage is current on the loan, the property owner has the exclusive right to use the property. Because a mortgagee cannot control access to the property, it is unfair to make it responsible for the neighbor's broken leg, a neighbor the mortgagee could not exclude from the property in the first place.

By the same token, the mortgagee also cannot enter the property and make it safe. In fact, the mortgagee usually has no right to enter the property at all. Even if the mortgagee knows the pit in the yard is dangerous and should be filled in or roped off, the mortgagee cannot enter the property to do so and cannot force the property owner to do so either. Because the mortgagee cannot prevent the hazard, it should not be held liable for an injury caused by the hazard.

A broad definition of "property" is that which a person has the right to use, control, or dispose of. If you do not control it, it is not your property, and you are not responsible for what occurs on it. Because the typical mortgagee does not have the right to control the use of the mortgaged property, the mortgagee is not responsible for injuries that occur on the property.

The flip side of this rule is that if a mortgagee is in possession of the property it is liable just as the landowner would be liable. Mortgagee can control the mortgaged property under two common circumstances: if it has foreclosed on the property, or if it has taken control of the property to use the income of the property to pay the loan. Both of these are remedies typically granted a mortgagee if the property owner does not pay his or her loan, and both can create liability for the mortgagee by putting the mortgagee in control of the property.

Foreclosure most commonly occurs with residential property or other property that is not producing income. If the loan is not paid, the mortgagee is given the right to foreclose on the property under the mortgage, sell it, and use the proceeds to pay off the debt. Although the details of the foreclosure process vary greatly from state to state, the mortgagee always eventually ends up taking control of the property. Under these circumstances, a mortgagee would be liable for injuries suffered on the property. For instance, if, instead of a neighbor, it had been a prospective buyer who fell into the hole after the mortgagee had foreclosed on the property, the mortgagee would be liable for these injuries.

Mortgagees also control the mortgaged property when they directly take the rent earned by the property to pay a defaulted debt, which often occurs with commercial property being rented to third-party tenants. The real value of many skyscrapers is not the value of the building itself but of the rents paid by the tenants every month. If the mortgagee takes the operation of the property and the collection of rents out of the hands of the mortgagor, the mortgagee controls the property. The same is also true if the mortgagee takes over the collection of rents from the mortgagor and then delegates the collection to a third-party management company. If the mortgagee does not exercise the same reasonable degree of oversight as the owner would have, it may be held liable for injuries even if it is not physically in "control" of the property.

Mortgagees in control of the mortgaged property owe a similar duty to persons coming onto the property as do property owners. The specific duty owed depends on the law in your state. At one time, it was uniform across the country that the nature of the duty depended on the status of the injured person: as a trespasser (on the property without permission), a licensee (on the property with permission but without benefit to the possessor of the land), or an invitee (on the property with permission and with benefit to the possessor of the land). Today, many states have removed these distinctions in favor of the general standard of what is reasonable under the particular circumstances of the given situation.

Conclusion

Although a mortgagee can be liable for injuries persons suffer while on the mortgaged property, this will happen only when the mortgagee is in control of the property and in a position to take the actions necessary to protect its own interests. Mortgagees should lend money to home buyers secure in the knowledge that they will not be surprised by liability for injuries beyond their control.

Lender Liability: Mortgagee's Liability for Injuries Suffered on the Mortgaged Premises

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