On appeal from the Superior Court of New Jersey, Chancery Division, Atlantic County, whose opinion is reported at 183 N.J. Super. 303.
Botter, Polow and Brody. The opinion of the court was delivered by Polow, J.A.D.
On this appeal we must determine the enforceability of a conditional "due-on-sale" provision in a real estate mortgage. The bond and mortgage contain provisions permitting the mortgagor to transfer the property with prior approval of the mortgagee which "shall not be arbitrarily or unreasonably withheld." The mortgagee refused to consent to the sale of the property without an additional agreement for an increase in the mortgage interest rate. When the sale took place without consent, plaintiff, the mortgagee, instituted suit to foreclose the mortgage.
Pursuant to an opinion published at 183 N.J. Super. 303 (Ch.Div.1981), summary judgment was granted for the mortgagor and its transferee. We agree with the trial judge's conclusion that the mortgagor's failure to accede to the demand for a higher interest rate does not justify the mortgagee's refusal to consent to the sale where such consent may not be arbitrarily or unreasonably withheld. We need not and do not pass upon the theory espoused in the trial court opinion that, in this state, an unconditional "due-on-sale" provision cannot be enforced except to prevent "impairment of the lender's security." Thus, we affirm but not for the primary reason articulated by the trial judge.
The facts are not in dispute. Defendant S.S.R. Realty Associates ("SSR") purchased real property in Atlantic City. It was financed in part by a purchase money mortgage of $224,000 with interest at nine percent per annum. The bond contained the following provision:
Mortgagor may assign, deed, or otherwise transfer the mortgaged premises without causing an acceleration of the installments due hereunder; provided, however, that the transferee assumes the obligations contained herein and in the Mortgage secured hereby. Mortgagor, however, shall not assign, deed or otherwise transfer the mortgaged premises without obtaining the prior approval of mortgagees, which approval shall not be arbitrarily or unreasonably withheld.
The mortgage included a substantially similar clause.
Sometime later SSR sought consent for sale of the property to defendant Boardwalk Regency Corporation ("BRC"). Plaintiff, the mortgagee, refused to consent without agreement for an increase in the mortgage interest rate. SSR, convinced that plaintiff's position was unreasonable and a breach of the mortgage terms, refused to agree to increase the interest rate and transferred title to BRC which assumed the mortgage according to its original terms. Plaintiff declared the sale a breach of the mortgage and instituted this action for foreclosure.
Plaintiff conceded that his security would not be impaired by the transfer but insisted then, as he does now, that his demand for increased interest was not arbitrary or unreasonable in the circumstances. He produced evidence that the prevailing mortgage interest rate was, at the time of the transfer, approximately 21 1/2 percent per annum.
The trial judge, relying upon the decision of the Appellate Division in Fidelity Land Div. Corp. v. Rieder & Sons, 151 N.J. Super. 502 (App.Div.1977), concluded "that the 'automatic enforcement' of a 'due-on-sale' clause is not justified and that an impairment of security is the only basis considered reasonable." Fogel v. S.S.R. Realty Associates, supra, 183 N.J. Super. at 307. He commented, in further support of that conclusion, that "[t]he case [ Rieder ] has been so interpreted. See 29 N.J.Practice (Cunningham & Tischler, Mortgages), § 26 at 22 (Supp.1981); see also Investors Sav. & Loan Ass'n v. Ganz, 174 N.J. Super. 356, 362 (Ch.Div.1980)." Fogel, supra, 183 N.J. Super. at 308.
We note that Ganz referred to the Rieder opinion even though Ganz did not involve a due-on-sale clause. Rather, in Ganz the mortgagee successfully ...