The Boston Redevelopment Authority d/b/a Boston Planning and Development Agency has the right to challenge a foreclosure that purportedly terminated a covenant restricting the use of property to affordable housing.

In allowing the BPDA’s suit to move forward, the Business Litigation Session of the Suffolk Superior Court recognized two truisms of Massachusetts foreclosure law. First, the foreclosing lender owes a duty of good faith and reasonable care to the borrower and holders of junior encumbrances or liens. If that duty is breached, the foreclosure sale could be invalid.

Second, foreclosure by the power of sale requires a public auction. If the buyer at the auction fails to close on the purchase, a foreclosing lender cannot simply transfer the property to itself. Typically, the lender should offer the property to the second highest bidder or conduct a second public auction.

In Boston Redevelopment Authority d/b/a Boston Planning and Development Agency v. Boston Private Bank and Trust Company, and Janet Blake, Trustee of 21 Warren Street Realty Trust, the case involved a residential condominium unit in Charlestown acquired by the owner under an affordable housing program administered by the BPDA. When the owner purchased the property, the deed included a covenant that (1) restricted ownership to a qualified individual of moderate income; (2) limited the sale price to a below-market price set by a formula; and (3) required the owner to occupy the unit as a principal residence.

The covenant provided the BPDA with the right to purchase the property upon notice of a pending foreclosure of the property. This protects affordable housing agencies by providing an opportunity to retain the property in the municipality’s affordable housing supply.

The covenant also provided that if the lender obtains title to the property by foreclosure or deed in lieu of foreclosure, the covenant terminates. This protects lenders from being saddled with affordable housing restrictions when a loan has gone bad and they need to take ownership of the property.

The owner died, and her estate defaulted on the loan. The bank notified the BPDA that it intended to foreclose, and the BPDA did not exercise its right to buy the property. The BPDA does not typically purchase properties in this context. At the foreclosure auction, the bank signed a memorandum of sale with the highest bidder. But the winning bidder walked away from the deal when he realized the property was being sold subject to the affordable housing restrictions in the covenant.

The bank then conveyed to the property to itself, which the bank claimed terminated the covenant. A few weeks later, the bank conveyed the property to another person allegedly affiliated with the original highest bidder free and clear of the covenant.

The BPDA cried foul and filed suit to void the sale and reestablish the covenant. But the bank’s counsel moved to dismiss the litigation by using the old “you snooze, you lose” argument: since the BPDA failed to buy the property prior to the foreclosure, the covenant is dead and the BPDA’s rights have lapsed.

However, the Superior Court held that the affordable housing covenant held by the BPDA is an encumbrance, thereby requiring the lender to exercise the power of sale with a “duty of good faith and reasonable care” to the BPDA. The Superior Court concluded that if the bank’s actions to take title to the property were specifically designed to terminate the covenant, such actions could constitute a breach of duty and taint the foreclosure. This determination will be the subject of additional court proceedings.