Owners may face financial trouble in acquisition
Property owners could run into financial trouble and banks be left with outstanding loans when sites are taken for the new central Christchurch blueprint.
The Government's compulsory acquisition scheme, to be used if owners do not negotiate or if talks fail, will immediately extinguish any mortgages on a property, leaving the lender with an unsecured loan.
Legally, a mortgage is the lender's right to a property as security for a loan, not the loan itself. This means removing the mortgage does not affect the loan, which the borrower must repay. Loan payments could then continue mounting while owners without rental income await compensation, a process that could involve lengthy court hearings.
The Government is buying about 800 sites for rebuild projects, including the green "frame" and specialist precincts, and will begin compulsory acquisitions in December.
Residential red zone and normal public works purchases allow for mortgages to be paid off first, but emergency laws governing the blueprint buy-up have no such provision.
Lawyer Michael Wolfe said the situation would catch many lenders and owners unawares.
"This could be a problem for owners - they are going to come under unwelcome pressure from the bank. If a property owner isn't able to provide alternative security, or isn't able to continue with payments, the banks are going to start putting pressure on the owner."
He expected owners could be forced to settle with the Government to avoid compulsory acquisition. Smaller lenders might try to call in loans, but the big banks might be prepared to wait if owners could continue payments while awaiting compensation.
Several major banks and the New Zealand Bankers' Association were unaware of the law threatening their mortgages when contacted by The Press yesterday.
Lawyer Richard Lang predicted lenders would quickly try to minimise loses once a compulsory acquisition was signalled.
Landlord Richard Peebles, who has about 12 properties to be taken, hoped to negotiate over his sites but had no idea whether negotiations would be fair.
"That they can seize the property and leave the owner having to pay the mortgage while they're not getting any rent, I struggle with that concept and I can't believe it would be legal. It just seems extraordinary."
Peebles said recent comments by Canterbury Earthquake Recovery Authority (Cera) head Roger Sutton and Prime Minister John Key had made things worse.
Sutton said owners unwilling to negotiate would be told "this is the offer - have a nice day", while Key has described central Christchurch land as "not worth a lot in its current state".
- © Fairfax NZ News
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