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 still 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 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, managing partner at Lane Neave, said many lenders and owners could be caught unawares.
"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.
- The Press