Commercial foreclosures are, in most cases, very similar to residential foreclosures. The foreclosure may be non-judicial or judicial depending on the state where the property is located and what the loan documents dictate. With both non-judicial and judicial commercial foreclosures, the process starts when the borrower defaults on the mortgage. A default occurs when the borrower falls behind in payments or fails to do something that the loan documents require, such as maintaining hazard insurance on the property. After the default, the lender may accelerate, or call due, the outstanding balance on the loan. Typically, the lender must first send a breach letter to the borrower that outlines the reason for default and gives a time frame during which the borrower may cure the default and avoid acceleration. Usually, the amount of time given to cure a default is thirty days, but this can vary depending on the terms of the mortgage. Once the time period expires, if the borrower has not cured the default, then the lender may commence foreclosure proceedings.
Non-judicial Commercial Foreclosures
A non-judicial foreclosure, or power of sale foreclosure, is an out-of-court process. With a commercial foreclosure, just like a residential foreclosure, the lender may proceed non-judicially if the loan documents contain a power of sale clause and if allowed by state foreclosure law. The power of sale clause is located in the deed of trust or mortgage and empowers a trustee sell the property without court supervision. This process typically involves recording a notice of default (or similar document) in the county records, mailing a copy of that notice to the borrower and other interested parties, as well as publishing the notice of default or notice of sale, though non-judicial procedures vary from state to state.
Judicial Commercial Foreclosures
Judicial foreclosures are processed through the court system and are initiated when the lender files a lawsuit usually in the form of a complaint for foreclosure or petition for foreclosure against the borrower seeking a judgment of foreclosure and order for sale. First, a title report will be ordered so that the lender’s attorney can determine all interested parties that must be named as defendants in the lawsuit. The defendants might include lien holders (like junior mortgage holders) or the U.S. Internal Revenue Service, if there is a federal tax lien on the property. The attorney will also receive copies of all underlying commercial mortgage documents, including the mortgage, the security agreement, the assignment of leases (if any), the assignment of rents (if any), any UCC filings, and any guaranties. Because commercial loans are often taken out in the name of the business, in many cases the business owner will have provided a personal guaranty pledging payment of the loan. The business owner as guarantor will also be included as a defendant in the foreclosure suit, along with the business itself. Each defendant must be served with a copy of the complaint for foreclosure, either personally or by publication if a particular defendant can’t be found. Defendants are given a certain amount of time, often 20 or 30 days, to file an answer to the complaint. In an uncontested foreclosure, the lender’s attorney will file a motion to obtain a judgment. In a contested case, the matter will typically proceed to trial. Once the judgment and order of sale have been entered, notice of the sale date will be given to the defendants and might be published, depending on state requirements. The foreclosure sale will be held, and the property will be deeded to the new owner after any applicable redemption period has expired.
Potential Defenses in a Commercial Foreclosure
In a commercial foreclosure, just like with residential foreclosures, many potential defenses are available to a property owner to fight the action. Possible defenses include:
• failure to comply with state foreclosure procedural requirements
• inaccurate affidavit
• failure to comply with notice provisions
• mistakes or errors
• failure to prove who owns the mortgage and note
• equitable estoppels
• laches, and
• unclean hands.
Tenants’ Rights Following a Commercial Foreclosure
The rights of any tenants in a foreclosed commercial property will depend on the terms of the lease and the date on which the lease was signed. The tenant’s interest could potentially be terminated by a foreclosure due to the legal concept referred to as “first in time, first in right,” which allows the purchaser of a foreclosed property to void a lease if the mortgage was executed before the execution of the lease. (See our article on The First in Time, First in Right Rule.) Many commercial leases contain a subordination, non-disturbance, and attornment agreement, or SNDA. Under the terms of an SNDA, the tenant agrees to subordinate, or make junior, its interest in the lease to any lender making a loan secured by the commercial property; the tenant agrees to attorn to, or recognize, any new owner of the commercial property as its landlord; and any new owner of the commercial property agrees not to disturb the tenant’s possession of the property as long as the tenant pays rent and complies with the terms of the lease. For tenants, an SNDA provides some assurance that their rights to their premises will be preserved even if the property is foreclosed.
Foreclosure Alternatives for Commercial Properties
Forbearance Attorney
One workout option for commercial loans as well as residential loans is forbearance. Forbearance is when the lender agrees to reduce or suspend mortgage payments for a certain period of time and not to initiate a foreclosure during the forbearance period. Sometimes the lender will also agree to waive or modify a mortgage requirement that the borrower is unable to meet. In a forbearance, the lender retains the right to resume the foreclosure once the forbearance period expires if the agreed-upon conditions are not met.
Lawyer For A Loan Modification
A commercial loan workout could also consist of a loan restructuring by means of a loan modification. With a modification, the lender might agree to:
• reduce the interest rate
• waive late fees
• delay or halt the foreclosure process
• cancel a receivership, or
• lengthen the amortization schedule.
Short Sale Lawyer
Another possible commercial loan workout option is a short sale. In a commercial short sale, as with a residential short sale, the borrower sells the property for a price that is less than the total debt. The lender agrees to release its lien on the property and to accept the proceeds of the sale in full or partial satisfaction of the outstanding indebtedness. Depending on the terms of the short sale agreement, the lender might be able to get a deficiency judgment by filing a lawsuit following the short sale. Lenders are, in general, more likely to seek a deficiency judgment after the short sale of a commercial property than a residential property.
Attorney for Deed in Lieu of Foreclosure
A deed in lieu of foreclosure is also sometimes an option for commercial borrowers who are facing foreclosure. A deed in lieu of foreclosure is a transaction in which the borrower voluntarily transfers title to the commercial property to the lender in exchange for the lender releasing the mortgage lien in full or partial satisfaction of the outstanding indebtedness. Borrowers are commonly given a release of all liability with deeds in lieu of foreclosure. But if the property is severely underwater (where the value of the property is significantly less than the total debt), the lender might require an additional payment or insist it retain the right to seek a deficiency judgment. A key benefit to a commercial deed in lieu of foreclosure transaction is that it generally provides a smoother transition of the commercial property than a foreclosure. Usually, there is a mutual cooperation clause in the agreement so that files, leases, and other records are easily transferred, and other issues that might come up are addressed. For this reason, lenders are sometimes more willing to consider a deed in lieu of foreclosure as an alternative to foreclosure for commercial properties than they are for residential properties.
Difference between Commercial and Residential Workouts
Workouts that are available for commercial properties are generally very similar to those that are available for residential properties. But one significant difference in the process of negotiating a workout involves the pre-negotiation letter. Whether a commercial property owner is seeking forbearance, loan modification, short sale, or deed in lieu of foreclosure, the commercial workout process often starts with the pre-negotiation letter, which provides an outline for the preliminary discussions about the workout. The purpose of the pre-negotiation letter is to avoid any misunderstandings during the workout negotiations. The letter will set the ground rules for the workout discussions, preserve the lender’s rights regarding the existing default, and might eliminate the ability of the borrower to later claim that the lender made verbal promises or otherwise acted improperly regarding the workout. The letter will typically require the borrower to acknowledge that a workout agreement is not binding until and unless it is formalized in writing and has been signed by all parties.
Commercial Real Estate Foreclosures
When considering investing in real estate, do not overlook the opportunities in income producing properties. Commercial real estate investment is an industry that offers one of the surest ways to gain wealth with the lowest barriers to entry. Real estate markets have ups and downs, with values fluctuating due to market conditions in certain localities primarily driven by overbuilding and high interest rates. Commercial real estate typically does not react to those outside factors in such broad swings. Values on commercial real estate tend to follow a steady upward path. The fact that a property is available through a real estate agent specializing in foreclosures, or on the foreclosure.com website, does not mean there is something wrong with it. Properties in this category are more likely to be in foreclosure or bankruptcy on an account of problems of the owner/developer than from forces directly related to the property. Prime properties and excellent opportunities abound in the commercial real estate space. Banks can be a good source of distressed commercial properties. They exist to attract accounts and make loans. Managing real estate is outside their area of expertise. Creditors end up owning properties they never intended to own, and are stuck with REO (Real Estate Owned), a particularly unwelcome item on their balance sheets. From an accounting standpoint, while real estate for owner/investors is an asset on its books, it is the opposite in terms of banking bookkeeping. Real estate on a bank’s balance sheet appears on the liability side of the leger. It is a liability that drags down their net worth and causes their auditors and regulators to restrict their lending activities. Thus the banks are highly motivated to move properties off their books, and often decide to cut their losses by discounting the sales price for a quick sale. One thing that banks are particularly bad at owns real estate, so any real estate on the books of a lender is an opportunity for an investor. The pathway to success in commercial real estate can be shortened by researching the commercial foreclosure and business foreclosure markets.
Foreclosure Rules Vary from State to State
First of all, as with most real estate laws, foreclosure rights and procedures are different in each state. These differences can be minor variations in things such as how many times a lender must publish notice of a foreclosure sale, or the number of days a borrower has to respond to a lawsuit. They can also, however, vary significantly in terms of borrower and lender rights. For example, a borrower may or may not have the right of redemption, which is the ability to recover their property following a foreclosure sale by paying the sale price, interest and other costs to the winning bidder or if the redemption happens before the sale, by paying the lender its outstanding debt and other costs.
Procedural Requirements
Because foreclosures result in the loss of property, including people’s homes, strict compliance with procedural items, such as the method and form various notices must take, is required. Accordingly, knowing when, where and what form notices must take (as well as all other procedural requirements) is critical to a successful foreclosure. While there may be some similarities, the procedural requirements for a foreclosure can vary widely from state to state.
Time to Complete the Process
Depending on the state, foreclosures can occur as quickly as 30 days, and up to seven months (or longer).
Right of Redemption
Some states grant a borrower a right of redemption, and others do not. Generally redemption is not available in non-judicial foreclosures unless the deed of trust grants the right. Even where they are given, there is a great deal of variation among the states as to the period in which a borrower must exercise or lose its right to redeem (generally between six months and a year). Further, state laws may condition the right of redemption, or modify the time period in which it can be exercised, on different factors, such as:
• Requiring the borrower to redeem the property before the foreclosure sale
• The percentage of the unpaid loan amount at the time of foreclosure judgment
• Whether the property has been abandoned
• Whether the borrower relinquished possession to the new owner (the winning bidder at the foreclosure sale) following demand
• Whether the borrower lost its source of income following foreclosure
• In what year the mortgage was granted
• Whether a lender gets a deficiency judgment
• Whether the lender was the foreclosing buyer
• The type of property (e.g., agricultural), and
• The terms of the mortgage or deed of trust
Deficiency Judgments
Where the proceeds from the foreclosure sale aren’t enough to pay the borrower’s unpaid debt, the lender may be able to obtain a deficiency judgment against the borrower for the difference. Some states permit them, and some do not. Generally such judgments are not available where a deed of trust was used. Again, however, even where a deficiency judgment is permitted, the states can differ on their application, such as the time period in which it must occur and conditions on its availability (e.g., a borrower may be able to avoid a deficiency judgment if it agrees to a sale of the property prior to foreclosure).
Commercial Property Foreclosure Lawyer
When you need a Commercial Property Foreclosure Lawyer call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506
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