Insights

The Las Vegas City Council recently proposed a city ordinance that would require lenders to register and maintain vacant property that is either in foreclosure or is the subject of a notice of default, or whose ownership has been transferred to a lender, mortgagee, or beneficiary of a deed of trust. The proposal may be attracting particular attention from Nevada lenders because it provides for the possibility of criminal penalties, including imprisonment, in the event of a violation. The City Council held a hearing on the proposal on November 15, giving lenders and other interested parties an opportunity to reshape the proposed ordinance’s requirements and penalties.

Under the terms of the proposed ordinance, a mortgagee that holds a mortgage on “specified property” must, in connection with an actual or pending default, inspect the property. If that inspection reveals that the property is not being occupied by the mortgagor or with the mortgagor’s consent, the mortgagee must register the property and, at that time, designate a property manager to inspect, maintain, and secure the property. Each registration would require a fee of $200, and any subsequent modification to a registration would require a fee of $50.

The proposal defines “specified property” to mean any parcel of vacant real property within Las Vegas that is subject to a mortgage and is property: (A) in foreclosure; (B) concerning which a notice of default has been filed; or (C) whose ownership has been transferred by any method to a lender, mortgagee, or beneficiary of a deed of trust. A parcel of real property is “vacant” if it is not presently occupied by persons lawfully entitled to occupy the property; temporary absences would not satisfy this vacancy standard if the lawful occupants intend to return and resume occupancy.

With respect to the standard of “actual or pending default,” which would trigger the mortgagee’s initial obligation to inspect the property, the term “default” means that the obligor under the mortgage has breached or is in default of a repayment or other obligation in connection with that mortgage. Notwithstanding the City Council’s intent, this definition, coupled with the “actual or pending default” trigger, could create an unworkable standard for lenders.

The proposal would require the initial inspection to occur before a notice of default has been provided to the obligor or recorded in the County Recorder’s Office or within ten days of that time. The proposal would require the registration and property manager designation to occur within five days after the inspection. Once a parcel has been identified as “specified property” subject to the ordinance, the mortgagee and its designated property manager must inspect and maintain the property on a monthly basis.

With respect to the maintenance standard, the proposal requires specified property to be maintained in accordance with applicable codes and ordinances, including standards regarding dangerous buildings, litter, and nuisance abatement. In addition, mortgagees and property managers must maintain all visible landscaping in front and side yards to the neighborhood standard. The proposal includes detailed definitions of “landscaping” and “maintenance of landscaping.” The proposal also requires mortgagees and property managers to maintain or drain pools and secure specified property so that it is not accessible to unauthorized people.

According to an article in the Las Vegas Review-Journal, the proposed ordinance’s maintenance requirements and criminal enforcement mechanism reflect the City Council’s frustration at having to take on maintenance responsibilities for abandoned and distressed houses. Representatives from the banking industry in Nevada are quoted in the article as objecting to the broad scope and early trigger of the proposal, in addition to the severe penalties for noncompliance. Industry comments have argued that the proposal should more clearly exclude commercial property and tie application of the ordinance to a notice of sale rather than default. Banks are concerned that, as currently proposed, the ordinance could require them to maintain property that they do not own and property that they have no legal right to enter.

We’re all familiar with the Pottery Barn Rule (which, incidentally, is not Pottery Barn’s policy): “You break it, you buy it.” The Las Vegas City Council’s proposed ordinance would add a new twist to this rule. For lenders, the rule in Las Vegas would become, “If your borrowers break their mortgage, you own the property’s upkeep.” According to the Las Vegas Review-Journal article, recent statistics indicate that, each month, around 300 more houses meet the proposed ordinance’s definition of “specified property.” Presumably, the possibility of imprisonment for violations means bank executives in Nevada will be checking to ensure that their lawn mowers have full tanks and sharp blades.

Michael A. Goodman is a partner in the Washington, D.C., office of Hudson Cook, LLP. Michael can be reached at 202-327-9704 or by email at mgoodman@hudco.com.