WeConservePA has refreshed its guide, Pre-Existing Mortgages in Easement Transactions: Using Non-Disturbance and Subordination Agreements to Prevent Extinguishment and Comply with Tax Law.
When a mortgage predates an easement on a property, the easement could be extinguished in a foreclosure if the owners default on their mortgage payments. And if the easement is to be donated and the donors wish to obtain tax benefits, additional complications arise. These problems can be avoided by obtaining an agreement from the mortgage holder appropriate to the circumstances.
A slightly more detailed summary of these complex real estate transaction possibilities is provided below, from the guide’s introductory section:
Pre-Existing Mortgages Present Challenges
When a property owner mortgages their property, this doesn’t present a problem for the holder of a conservation or trail easement on the property. However, when an easement is placed on a property that is subject to a pre-existing mortgage and this mortgage isn’t addressed during the easement planning, serious risks arise:
- If in the future the property owner defaults on mortgage payments (or otherwise fails to comply with the mortgage terms), the mortgage holder may foreclose and the easement may be extinguished.
- If a donation of an easement is to be used as a charitable deduction for federal tax purposes, tax law requires that the permanence of the easement must not be threatened by possible foreclosure on a pre-existing mortgage.
There are two ways to eliminate these risks:
- The property owners could pay off the mortgage and refinance with a new mortgage after the easement is put in place. This would put the easement holder’s interest ahead of the mortgage holder’s. This is the simpler solution but not always practical from the owners’ financial standpoint.
- The property owners could request and the mortgage holder could agree to allow the easement to survive a potential foreclosure and to resolve other potential sources of conflict between the two interests so as to satisfy the easement holder’s need for permanence.
What Is Needed from the Mortgage Holder?
For the latter alternative, the agreement by the mortgage holder may, depending on the circumstances, require some or all of the following provisions to effectively protect the easement holder: