Everything You Need To Know About Commercial Foreclosures

What You Should Know About Commercial Foreclosures
445 Views 0 January 6, 2022

What is a Commercial Foreclosure?

  • A commercial foreclosure is when a lender takes back the property from a borrower typically for falling behind in payments.
  • Other violations of the terms of the loan can lead to commercial foreclosure as well; they include:
    • Not maintaining the agreed upon debt coverage ratio.
    • Not paying property tax.
    • Or violating any other clauses that may exist in the loan agreement.

Commercial foreclosures occur all of the time and for various reasons. Oftentimes it is not because the borrower is a bad person or made bad choices but because life happens, people fall on hard times and sometimes it can just come down to bad luck.

Other times, situations arise that could have been prevented by consulting with a legal representative to offer advice and make you aware of the rights you have as a commercial property owner. Each state has its own set of laws and regulations, so it would be good for you to take a foreclosure attorney free consultation.

Types of Commercial Foreclosures

How long does it take to foreclose on a commercial property? That depends on the state you live in and the types of foreclosure allowed by law and the terms of your loan agreement.

When it comes to a commercial building foreclosure, it is important to know the difference between the two types of commercial real estate foreclosures.

Depending on the state where the foreclosure property is located, you will either face a judicial or a nonjudicial foreclosure. Terms and conditions of the mortgage agreement can also dictate which type is used. 

In the state of New York, and most states of the United States for that matter, strict foreclosure is not an available option; it is only available in Maine, Vermont and Connecticut. For the sake of our readers, we’ll discuss the two options that are available.

Nonjudicial Foreclosure

Depending on the state government involved, a nonjudicial foreclosure does not have to involve a court trial. This method is much faster and efficient for all parties involved. This process allows lenders to invoke the power of sale clause that is found in the deed. As long as the lender follows the regulations of this clause and those laws of the state for foreclosure, the process is legal and very efficient. 

As you can decipher from the name, these types of commercial property foreclosure are legal alternatives to going through the court system. There are many benefits for the lender in using this type of foreclosure, but again, it depends on whether they are legal in the state and whether the mortgage contains a “power of sale” clause. 

This type of foreclosure is currently allowed in 29 states and the District of Columbia. 

Judicial Foreclosure

In the state of New York, judicial foreclosure is required by law. 

It is a more costly and lengthy process compared to nonjudicial and requires several visits to the courts on the part of the lender. 

Typically, the process for judicial foreclosure follows this path:

  • The lender goes to court to file a suit against the borrower, typically to get them to bring the loan current or legally agree that they can no longer make the payments and agree to the foreclosure process.
  • Usually, after this court visit, the borrower has 3 to 4 weeks to file a response with the court; again, another court visit that takes time and money.
  • In instances where the borrower contests the foreclosure proceedings, the two parties will then go to a trial court. 
    • At this court preceding an auction date is set and can be held about 90 days from this time if the lender wins the suit.
  • If the borrower wins the lawsuit, they must bring their loan current and continue with their agreed terms.
  • If the lender wins the suit, a legal judgment of foreclosure and an order of sale is then awarded to the lender. 

Again, because this process involves the courts these commercial foreclosures take much more time and work hours than nonjudicial foreclosures.

Court-Appointed Receivers for Commercial Foreclosure

Whether you are dealing with a judicial or nonjudicial foreclosure, oftentimes a receiver will be appointed to take over ownership duties from the borrower to ensure that the property is maintained properly and ensure that it is still adhering to legal and leasing obligations. 

A court appointed receiver typically carries out these important functions:

  • Ensuring the property is secured and that its insurance status is maintained.
  • Maintenance and upkeep of the property in question.
  • Collects rent from tenants of the property and uses that credit towards the borrower’s outstanding debt.

What Happens during a Commercial Foreclosure?

Once the commercial foreclosure proceedings are finished and the sale is legally allowed, the property is put up for auction.

  • The property is then sold to the highest bidder.
    • The funds paid to purchase the property are then used by the lender to pay off the debt that was owed by the original owner.
  • If there are no bids on the property, or if the bids are too low, the lender will then bid on the property.
    • A credit bid, or commonly known as a lender’s bid, includes all of the fees and other categories of the debt that apply to the property; these typically include:
      • The principal balance.
      • Accrued, unpaid interest (which continues to accrue during the foreclosure).
      • Late charges.
      • Legal fees and other miscellaneous charges that come up.

Options to Avoid Commercial Foreclosure

As we mentioned earlier, whether dealing with commercial or residential property, life happens and things don’t go according to plan. Life events do occur that add pressure and strain to the finances of individuals. 

The best advice is that when this danger of defaulting begins to show up, it is best to speak with your lender and make them aware of the current situation. 

Typically, lenders do not want to go through the time and cost of going through a foreclosure and they will be more than willing to work with you to come up with a plan to help you prevent default on the loan. 

Lenders can offer the following solutions to your financial difficulties:

  • Forbearance
    • With a forbearance plan, a borrower will agree to catch up on overdue payments over an agreed upon amount of time. Of course during this time interest and late fees continue to accrue.
  • Loan modification
    • Through loan modification, the two parties can agree to change the terms and conditions of the original loan agreement. Types of changes can be:
      • Reduction in the interest rate, which lowers the monthly payment total.
      • Extension of the life of the loan, which allows the borrower to forego paying current missed payments and pay them at the end of the loan. 

It is important to remember, no matter how far along the foreclosure process gets, at any time that the borrower can become current on their debt the commercial foreclosure process stops and the borrower is once again in good standing; this can happen up to the date of the auction.

Find a Foreclosure Attorney to See All Your Options 

Going through a foreclosure, or the prospect of one, is a very stressful and confusing time for both owners and tenants. It is easy to get disheartened and just give up due to the stress levels. 

It is during these stressful times that you find an attorney that can help you navigate these stressful situations and lead you to the best possible solution to the situation. With the right attorney and their consultation, you can avoid commercial foreclosure if you want, or make the transition through a foreclosure as painless as possible.

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