When a Fire Strikes

By Daryl M. Johnson, Esq.

When a rental property suffers a devastating fire, most owners assume they’ll have the freedom to use the fire insurance proceeds to pay off their mortgage or make other financial decisions. But in cities like Springfield and others in Massachusetts, property owners can be in for quite a surprise. Local ordinances — combined with the city’s enforcement powers — can significantly limit what you and your lender are allowed to do with the building and the insurance funds.

Fire Insurance Proceeds: Not Always Yours to Direct

In many cases, a mortgage instrument allows the lender to apply insurance proceeds toward repairing the mortgaged property or paying down the outstanding loan in the event of a casualty. However, when a building is declared uninhabitable, condemned, or becomes a blighted nuisance, local governments can, and will, step in. In Springfield, under its municipal code and zoning regulations, the city has the authority to initiate enforcement actions in housing court that affect both property owners and lenders.

Daryl M. Johnson

“When a building is declared uninhabitable, condemned, or becomes a blighted nuisance, local governments can, and will, step in.”

City Intervention in the Aftermath of a Fire

Under Springfield’s Code of Ordinances — particularly its anti-blight, nuisance, and vacant property regulations — the city may take swift action when a structure is significantly damaged by fire. If the building is left vacant, unsecured, or deemed a public safety risk, the city can initiate a housing court action to enjoin the property owner and the mortgage lender from accessing or making unilateral decisions about the property.

It can also seek a receivership order, allowing a third-party receiver to take control of the property, make repairs, and recover costs via liens, and it can even restrict or monitor the use of insurance proceeds, particularly when used for purposes other than code compliance, demolition, or rehabilitation.

In some cases, the city may record a lien or notice of violation that clouds title and complicates, and in some instances prevents, refinancing, resale, or redevelopment.

Mortgage Lenders Are Not Exempt

Springfield ordinances don’t just target property owners — they also involve mortgage holders, especially when lenders receive insurance proceeds or attempt to foreclose on or dispose of fire-damaged properties without addressing code violations or unsafe conditions.

Housing court judges have broad powers to issue injunctive relief against lenders and loan servicers, require insurance proceeds to be escrowed, and prevent satisfaction or discharge of the mortgage until compliance is achieved.

Best Practices for Owners and Lenders

If you own a fire-damaged rental property in Springfield, consider these immediate steps:

• Notify the city’s Code Enforcement Department to assess the building and clarify obligations.

• Consult legal counsel before using fire insurance proceeds or negotiating with your mortgage lender.

• Secure and maintain the site to avoid blight premises designation.

• Engage a licensed contractor to prepare a code-compliant rehabilitation or demolition plan.

• If you’re a mortgage lender, be prepared for involvement in housing court and restrictions on the application of fire insurance funds to pay off the mortgage loan.

Regional Enforcement: Not Just Springfield

The city of Springfield is not the only municipality in Western Mass. aggressively enforcing fire-damaged and blighted property regulations. Other cities, such as Holyoke, Chicopee, and Worcester, are similarly proactive. These municipalities frequently seek injunctions against both owners and mortgage lenders like those sought out by the city of Springfield.

A fire doesn’t just damage real estate — it can fundamentally alter your legal rights as a property owner or lender. In Springfield and surrounding cities, local governments have legal authority to control what happens next. Whether you’re trying to use fire insurance proceeds to refinance, repair, demolish, or sell the property, failing to understand the municipal framework could land you with housing court violations, penalties, or fines.

Legal counsel familiar with local ordinances and housing court procedure is essential to avoid costly missteps and navigate court-ordered restrictions.

Daryl M. Johnson is an attorney in the Real Estate and Business and Finance practices at the law firm Pullman & Comley. She is based in the firm’s Springfield office.