Disclaimer
This article is for educational purposes only and does not constitute legal advice.
Detailed Answer
When co-owners seek a court-ordered partition sale in New Jersey, any mortgages on the property must be handled before co-owners divide the net proceeds. Under New Jersey law, a partition sale typically converts real estate into cash, which then satisfies encumbrances and distributes remaining funds to co-owners according to their ownership shares.
1. Mortgagees as Parties to the Partition
New Jersey requires that all mortgage holders on the property be joined as parties in the partition action. The court will determine each mortgagee’s interest and ensure they receive payment out of sale proceeds. See N.J.S.A. 2A:65-5.
2. Sale Free of Liens, with Proceeds Reserved for Mortgage Payoff
The master or referee conducts the public sale, and the purchaser receives title free of existing mortgages. The sale contract requires that the clerk or master hold the gross proceeds in escrow. The clerk applies funds first to satisfy liens and mortgages in priority order, then distributes the surplus.
3. Order of Priority
Proceeds pay out in the following general order:
- Costs of sale (publication, auctioneer or referee fees).
- Property tax liens and municipal assessments.
- First mortgage holder’s claim.
- Second and junior mortgage holders or other recorded liens.
- Judgment creditors with recorded liens.
Any unpaid balance on a mortgage after sale proceeds are applied may remain a personal obligation of the borrower but does not further encumber the partitioned property.
4. Division of Net Proceeds
After all valid encumbrances and sale costs are paid, the clerk divides the remaining funds among co-owners per their ownership interests (e.g., a 60/40 split if one owner holds 60%). A co-owner whose share is fully absorbed by their mortgage payoff may receive no net funds but retains credit against any mortgage deficiency.
5. Practical Considerations
Mortgage holders generally waive their right to oppose sale if they agree to payment from proceeds. If a mortgagee objects, the court can require additional security or bonding to protect their interest. Co-owners can agree to “buy out” a mortgaged interest by assuming the debt and paying other owners directly, thus avoiding a public sale.
Helpful Hints
- Obtain a comprehensive title search to identify all liens and mortgage holders.
- Review mortgage balances and interest rates to estimate payoffs before sale.
- Consult the county clerk’s office on sale costs and required notices.
- Consider settlement or buyout agreements to simplify or avoid an auction.
- Ensure the partition order accurately reflects owner shares and lien priorities.