Many business owners today are struggling to maintain commercial real estate loans. With rates down and vacancies at historic highs, commercial real estate is performing quite poorly. These factors inevitably lead to defaults, foreclosures, and a substantial drop in the commercial real estate market. However, there may be a silver lining for commercial real estate owners. Due to the high number of defaults, many commercial lenders are now willing to renegotiate the terms of commercial loans. This was all but unheard of just a few years ago.
Your Commercial Loan Modification
If you are a commercial real estate owner facing a difficult commercial real estate situation, LA Legal Law Firm can help. Over the years we have successfully negotiated commercial loan modifications and saved our clients dreams (and credit). We always consider the bigger picture including our clients’ commercial real estate objectives and overall time horizon.
We are currently taking on new commercial loan restructuring clients on the following types of properties:
When a borrower defaults on a commercial loan by ceasing to make mortgage payments, a foreclosure does not have to be inevitable. There are several alternatives to foreclosure available for commercial loans.
One workout option for commercial loans (as well as residential loans) is forbearance. Forbearance is when the lender agrees not to enforce its foreclosure rights in exchange for the borrower taking some action to cure the default, such as make the past due mortgage payment over a prescribed period of time. 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 loan has not been brought current or if certain agreed upon conditions are not met.
Loan Restructuring & Commercial Loan Workouts
A commercial loan workout could also consist of a loan restructuring by means of a loan modification. With a modification, the lender may agree to:
The popular Home Affordable Modification Program (HAMP) is not available for most commercial properties, though 1-4 unit rental properties may qualify for a modification under the program.
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 may be able to obtain a deficiency judgment by filing a lawsuit following the short sale. Lenders are more likely to seek a deficiency judgment following the short sale of a commercial property than with a residential property.
Deed in Lieu of Foreclosure
A deed in lieu of foreclosure is also an option for commercial borrowers who are facing foreclosure. A deed in lieu of foreclosure is a transaction where 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. However, if the property is severely underwater (where the value of the property is significantly less than the total debt), the lender may 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 tenant files, leases, and other records are easily transferred, and other issues that may 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.
A 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. However, one difference in the process of negotiating a workout involves the pre-negotiation letter. Whether a commercial property owner is seeking a 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 may 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 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.
Defending the Foreclosure
esidential foreclosures have been thoroughly covered in the media. However, commercial property owners can also face foreclosure. In a commercial foreclosure, just like with residential foreclosures, there are many potential defenses available to a property owner that can be used to fight the foreclosure.
Potential Defenses in a Commercial Foreclosure
Failure to Comply With State Procedural Requirements
Each state has its own procedures for foreclosures (see State Foreclosure Laws). The foreclosure will be nonjudicial or judicial, and there are certain requirements, such as notice timelines, that must be strictly adhered to. If the lender bypasses a requirement, such as neglecting to provide notice of the foreclosure to the borrower or failing to comply with the timeline as dictated in the state statutes, then that failure to follow the relevant state procedural requirement can provide a defense to the foreclosure.
Inaccurate Affidavit of Fact
Many states require that the lender provide an affidavit attesting to the amounts due on the debt, including the amount of the unpaid principal balance, unpaid interest due, late fees, attorney fees, etc. The affidavit is filed in support of the complaint for foreclosure or judgment in judicial foreclosure states. The affidavit must be accurate and signed by a person with personal knowledge of the contents therein. It is a defense to foreclosure if the affidavit is false, inaccurate, or “robo-signed” (which means the the signing party had no knowledge of whether or not the information contained in the document was correct).
Failure to Comply with Notice Provisions
Most mortgages and deeds of trust contain a provision that requires the lender to provide notice, usually in the form of a letter, to the borrower of the default prior to accelerating (or “calling due”) the outstanding balance of the loan. The amount of notice required varies, but it is usually ten or 30 days. If the loan documents require a notice, but lender fails to provide such notice, this can be raised as a defense to the foreclosure.
Mistakes or Errors
Loan servicers sometimes make errors when servicing a loan. Mistakes may include misapplying a payment, charging non-recoverable fees, or overstating the amount needed to pay off or reinstate a loan.
Failure to Prove Who Owns the Mortgage and the Note
Lenders must actually own the mortgage, by way of a proper assignment of mortgage, and promissory note, by way of a note endorsement, prior to initiating foreclosure for the foreclosure action to be valid. It is a defense to foreclosure if the lender cannot prove they owned the loan at the time the lawsuit was filed or the date that the nonjudicial foreclosure was initiated.
Equitable estoppel is a defense that, if successful, precludes the lender from being granted a foreclosure judgment because the lender acted unfairly. For example, if the lender made false representations to the borrower or concealed material facts during the foreclosure, it may be barred from judgment by reason of equitable estoppel.
Laches is when the party that filed the lawsuit unreasonably delayed the filing and, as a result, caused prejudice to the other party by such delay. This is different from a statute of limitation; with laches, if the lender waits an unreasonable amount of time before starting the foreclosure, the court will not allow the lender to foreclose, even though the statute of limitations may not have expired.
If a lender is unethical, makes misrepresentations, acts illegally, or there is evidence of fraudulent conduct, then the equitable doctrine of “unclean hands” may apply and the lender would not be allowed to foreclose.
Fair Debt Collection Practices Act
It is important to note that defenses based on the Fair Debt Collection Practices Act (FDCPA) are not applicable in commercial foreclosures. The FDCPA does not apply to commercial loans. 15 U.S.C. § 1692a.