If you’re behind in the payments for a mortgage on a commercial property and want to avoid foreclosure, your lender might allow you to enter into an alternative arrangement that meets your needs. For instance, a repayment plan or mortgage modification will allow you to pay arrearages (the past-due balance) over time. The lender might allow you to sell the property for less than you owe in a short sale. Finally, a deed in lieu of foreclosure would enable you to give the property to the lender.
Here's what you need to know about avoiding commercial foreclosures.
Repayment Plan: Getting Current on the Loan
A "repayment plan" allows the borrower to bring a loan current by paying the past due amount over a particular period. You and the lender will agree on a payment schedule without changing the loan terms.
Mortgage Modification: Adjusting Your Loan Agreement
With a "mortgage modification," the lender agrees to change the terms of the original loan agreement. The changes could include:
- lowering the interest rate, which in turn would reduce the payments
- waiving late charges or other fees
- canceling an existing receivership
- capitalizing the overdue amounts (adding them to the outstanding loan amount), or
- extending the repayment term.
Short Sale: Selling the Property for Less Than You Owe
A "short sale" allows you to give up the property without going through a foreclosure. In a short sale, the property is sold for less than the amount owed on the loan. But the lender might be able to obtain a personal judgment, called a "deficiency judgment," against the borrower for the difference between the outstanding mortgage debt and the sale price.
In general, lenders are more likely to seek a deficiency judgment if the property is commercial rather than residential. (A deficiency judgment might be dischargeable in bankruptcy so it's important to meet with a bankruptcy attorney before the lender receives the deficiency judgment—or as soon after as possible.)
Deed in Lieu of Foreclosure: Give the Property to the Lender
A "deed in lieu of foreclosure" is another way to relinquish a commercial property without going through the foreclosure process. In a deed in lieu of foreclosure transaction, the borrower voluntarily agrees to convey (give) the title to the property to the lender.
Usually, the lender won’t seek a deficiency judgment with a deed in lieu of foreclosure. (The deficiency amount would be the difference between the fair market value of the business property and the outstanding mortgage debt.)
Defenses to a Foreclosure on a Business Property
If you're unable to work out an option to avoid foreclosure, you might be able to a defense to the foreclosure. For example, you might be able to claim that:
- the lender didn’t follow the proper foreclosure procedures that state law requires
- 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.
Talk to a Lawyer
If you're facing a foreclosure for a business property, consider consulting with a qualified foreclosure attorney or commercial real estate lawyer who can review your loan documents and advise you of your options.