When a business owner falls behind on the mortgage payments for an office building or retail center, the commercial lender will begin foreclosure proceedings to sell the property and satisfy the debt. Commercial foreclosures proceed in much the same way as residential foreclosures but with some differences. For example, if the borrower is an absentee property owner or is inattentive to the needs of the business, the lender might ask the court to protect the investment by appointing a third-party “receiver” to manage the business during the foreclosure.
What Are Commercial Foreclosure Procedures?
The laws of the state where the property is located determine whether the lender can use a streamlined nonjudicial foreclosure process or whether the foreclosure must proceed through the state court system.
- Nonjudicial foreclosures. In a "nonjudicial foreclosure," the lender must follow the steps outlined in statutory law before selling the property at auction. Once the procedural steps are complete, the lender can sell the property at a foreclosure sale.
- Judicial foreclosures. A "judicial foreclosure" begins when the lender initiates a lawsuit by filing a complaint or petition with the court. If the lender receives a foreclosure judgment, the property is sold to repay the outstanding mortgage debt.
What Is The Role of the Receiver During a Foreclosure?
In a foreclosure, the property owner is entitled to remain in possession of the business as long as the owner preserves the value of the asset securing the lender’s investment. If, however, the borrower allows the property to decline or fails to abide by contract provisions in the loan documents, the lender can ask the court to appoint a receiver as part of the judicial foreclosure. (If the lender chose to proceed with a nonjudicial foreclosure, the lender could request relief in a separate lawsuit.)
For instance, a lender will typically include a contract provision entitling the lender to receive tenant rents in the event of default—and it makes sense. If a business is failing, an owner might pocket the rents instead of turning it over to the lender. A receiver can collect the rents and ensure that the property remains attractive to buyers by filling tenant vacancies and promptly responding to maintenance issues.
If the court grants the lender’s request, the receiver will manage the business property until the foreclosure sale. The lender can ask for other relief, as well. For instance, the court might allow the receiver to sell the property before the foreclosure is complete as long as the lender, borrower, and any junior lienholders agree.
How to Avoid Foreclosure on a Business Property
All parties involved in a foreclosure feel its effects. Most lenders are willing to lessen the adverse effects on the borrower by considering the following foreclosure alternatives:
- offering the borrower a repayment plan (the borrower makes up missed payments over time)
- suggesting a mortgage modification (change in loan terms)
- agreeing to a short sale (a sale for less than the amount owed on the loan), or
- accepting a deed in lieu of foreclosure (the borrower legally returns the property to the lender).
When borrowers can’t successfully arrange for an alternative to foreclosure, they might still be able to raise one or more defenses to fight the foreclosure. For example, you could be able to argue that:
- the lender didn’t follow the proper foreclosure procedures under state law
- the lender didn’t provide notice as required by the mortgage contract, or
- the mortgage servicer made mistakes or errors in its handling of the loan account.
How Foreclosure Sales Work for Business Properties
At the foreclosure sale, the lender will make a “credit bid,” which means the lender won’t come up with actual money. Instead, the lender will get credit for the total amount of the debt owed by the borrower, including the principal, interest, late fees, attorneys’ fees, and foreclosure costs. The lender uses the credit to bid at the foreclosure sale.
If no third party bids higher than the lender’s credit bid, the lender becomes the new owner of the commercial property. On the other hand, if a third party outbids the lender, the third party becomes the new owner of the property. The sale proceeds are then used to repay the mortgage obligation.
Hiring an Attorney to Help With a Business Property Foreclosure
Figuring out your best response to a looming foreclosure calls for a professional’s analysis of your situation. Depending upon the provisions in your loan documents, you might stand to lose more than the foreclosed property. A lender can often satisfy the outstanding debt by using collection tools. For example, you might have cross-collateralized the loan by pledging additional property as security. Your loan documents might include a clause that allows the lender to recoup losses by repossessing fixtures and goods owned by your business. You also might have signed a personal guarantee that allows the lender to satisfy any outstanding debt by proceeding against your home, bank accounts, and other personal assets.
If you’re not sure about the extent of your lender’s rights, you should consult with a qualified attorney who can review your loan documents and advise you of your options.