The Superior Court of New Jersey sent a cautionary message to the banking industry when it ruled that one of the largest New Jersey mortgage lenders was liable for defects in condominiums that it assumed construction responsibilities for after a builder/developer defaulted.

The judgment went against Midlantic National Bank, of Edison, N.J., which took a partially completed condo project and assumed responsibility for all aspects of the development, including completion of construction and marketing. The ruling, which just recently came to light, was handed down July 19, 1993, and cost the lender $132,300.

Midlantic pumped about $1 million into the condo project to complete it, but ran into trouble after it began selling the individual units and residents began complaining of defects.

Good faith remedial repairs were made, and eventually a study sponsored by the Terrace Condominium Association determined various patent defects, both structural and otherwise, were the result of improper workmanship and substandard or missing materials. After Midlantic refused to proceed with further repairs in September 1988, Terrace sued claiming Midlantic had breached warranties of habitability and reasonable workmanship.

According to the decision, the court ruled:

*Because Midlantic took over construction of the project, it was responsible for all defects, even those that were the result of the original borrower. Midlantic had held it should be liable for only those defects that were the result of the construction performed under its supervision;

*Because it began repairing the project based on a report provided by Terrace, it implied that it would fully remedy defects in the building. Midlantic argued the two-year statute of limitations barred the associations legal action, but the court ruled the statute of limitations did not apply because the association delayed pursuit of legal remedies because it relied on Midlantics good faith.

Midlantics problem is not unheard of in the mortgage lending industry. Sometimes [lenders] have no choice, said Alan S. Kaplinsky, a partner with the Philadelphia law firm of Wolf, Block, Schorr and Solis-Cohen. Kap-linsky, whose firm was not involved in the case, said sometimes lenders in midst of construction assume the building responsibility in order to salvage the loan. Sometimes theyve got to get the project completed. Its not very unusual and its happened a lot over the last several years.

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