Lenders Beware: Omitting One Word in a Mortgage Could Impact Your Right to Foreclose

In the Supreme Judicial Court case of James B. Nutter & Company vs. Estate of Murphy, et. al. (and two consolidated cases) dated January 18, 2018, the SJC had to decide if the language in a reverse mortgage incorporated the statutory power of sale as required by M.G.L c. 183, sec. 21 allowing the lender to foreclose on the mortgage.

In 2007 and 2008 three borrowers obtained loans from the lender. The loans were obtained by virtue of reverse mortgages. With a reverse mortgage the borrower obtains an equity line of credit based upon the value of their home. Unlike a standard mortgage the lender looks to the equity in the property when the borrower dies or sells the property. A reverse mortgage, however, is a nonrecourse loan in which the lender’s only remedy is to foreclose. The borrower would not be liable for a deficiency balance if the loan proceeds exceed the value of the home at the time of the foreclosure sale.

The lender sought to foreclose on the properties under a power of sale in accordance with M.G.L. c.183, sec. 21. In Massachusetts there are three ways to foreclose: (i) statutory power of sale; (ii) sale by entry; or (iii) foreclosure by action. Lenders most often rely on the statutory power of sale. The statutory power of sale is the ability to foreclose without a judicial proceeding. In the lender’s mortgages they contained a provision “that the lender may invoke the power of sale and any other remedies permitted by applicable law.” The lender’s mortgages failed to include the word “statutory” power of sale as required by Massachusetts law, making the provision uncertain.

As a result, the language in the mortgages suggests that the lender could have avoided the ambiguity of the language by incorporating the word “statutory” before the “power of sale.” The Court noted that it is uncertain whether the mortgages include a statutory power of sale. In fact, the language suggests a judicial foreclosure.

The SJC, however, concluded “that the only reasonable and practical interpretation of the mortgage is that it incorporates the statutory power of sale” and “no reasonable borrower in Massachusetts would understand that this power of sale would be anything other than a statutory power of sale” and decided that the language in the lender’s mortgages includes the statutory power of sale. To decide that the language of the mortgage does not infer a statutory power of sale would give the lender no recourse to foreclose pursuant to a statutory power of sale. Therefore, the SJC upheld the Land Court’s judgment to allow the lender to foreclose.

This case is significant because the exclusion of one word may impact a lender’s right to foreclose. The SJC could have easily ruled that the lender could not foreclose due to a lack of proper statutory power of sale provision in the mortgages. To avoid any uncertainty, it is imperative that loan documents drafted by lender’s counsel adequately define the lender’s rights and remedies, including its right to foreclose under a statutory power of sale.