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Court Confirms That Mortgage Can Be Paid From Proceeds at Closing

When real property encumbered by a mortgage is sold, arrangements are often made to pay off the mortgage from the sale proceeds at the closing. Real estate attorneys, lenders, and title insurers have established procedures to allow the transaction to close while ensuring that the payoff takes place and a satisfaction or assignment of the mortgage is documented and recorded.

The court’s decision in Prendergast v. Swiencicky, 183 A.D.3d 945 (3d Dep’t May 7, 2020), upholds this common practice. In this case, the contract purchaser under the standard form of purchase contract used in upstate New York refused to close because, at the time of the closing, there were two bank mortgages on the property, even though everything was set to pay off the mortgages immediately from the sale proceeds. The court held that the purchaser had defaulted because paying off an institutional mortgage from the proceeds is a customary practice. A dissenting judge argued that however common this procedure might be, the contract did not authorize it and the purchaser was within her rights not to close. Even though the court decision upholds the practice of paying off mortgages at closing, parties and attorneys may wish to avoid any question by including language in the purchase contract reflecting that this is what will actually occur.