If a commercial borrower (or commercial tenant) falls behind on commercial building payments (or lease payments), the lender or lessor can declare a default and foreclose on the property. The execution of a mortgage or deed of trust (or lease agreement) creates a security interest in the property that gives the lender the right to start foreclosure proceedings to force a sale of the property (or eviction) upon the borrower’s failure to pay the loan/lease according to terms. The good news is that lenders don’t like foreclosures because they’re costly and difficult. The bad news is that lenders won’t hesitate to foreclose on past due loans (or leases) if they aren’t given better options.
Commercial foreclosures are, in most cases, very similar to residential foreclosures. The foreclosure may be nonjudicial or judicial depending on the state where the property is located and what the loan documents dictate. With both nonjudicial 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. 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.
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.
Many commercial leases contain a subordination, non-disturbance, and attornment agreement, or SNDA. Under the terms of an SNDA, the tenant agrees to subordinate 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.
-Options in Dealing with Foreclosures
- Reorganizing, consolidating or even eliminating debts through proceedings that may include bankruptcy
- Trying to work out a compromise with the lender
- Selling the building
-Negotiating with the Lender
- Different payment terms (lower payments over a longer period of time)
- Forgiving some late payments now in exchange for a longer period of payment
- Lower payments in exchange for a higher interest rate over a longer payment period
- Refinancing at a lower interest rate (to make payments lower)