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Commercial Mortgage Foreclosure

If a commercial borrower falls behind on commercial building payments, the lender can declare a default and foreclose on the property. The execution of a mortgage or deed of trust creates a security interest in the property that gives the lender the right to start foreclosure proceedings to force a sale of the property upon the borrower’s failure to pay the loan 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 if they aren't given better options.
Options in Dealing with Foreclosures
The chances are that a commercial building loan is only a part of bigger financial problems. Rather than delaying, a borrower should develop a game plan to deal with the situation immediately. Options include:
  • 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
A lender may be willing to compromise. Possible options include the following:
  • 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) 
Deeds In Lieu of Foreclosure
If a lender is unwilling to compromise, consider offering to convey the property back to the lender voluntarily by a "deed in lieu of foreclosure" (sometimes called "deed in lieu of forfeiture"). A lender may be hesitant to accept a "deed in lieu" if state law provides a borrower with a right to redeem property for a certain period of time (e.g., up to a year later).
The Foreclosure Process
State laws vary greatly, but the foreclosure process generally involves:
  • The lender’s giving a written notice of default
  • A period of time after proper notice to pay the lender the amount required to cure the default and to reinstate the loan
  • The lender’s electing to proceed with foreclosure under available remedies, which may include:  
o          Pursuing a judicial foreclosure by filing a lawsuit to obtain a court order to sell the property
o          Pursuing a non-judicial foreclosure by following procedures spelled out in the mortgage (or deed of trust) that allow a trustee to foreclose on and sell the property without a court order
  • After the required time has elapsed, the providing of a notice of foreclosure sale
  • A public sale being held by auction where the highest bidder can buy the property
  • The lender itself buying the property by submitting a credit bid based on the amount owed on the mortgage, if no one else bids enough on the property
  • Private sale at a later date if the lender buys the property
  • An unlawful detainer lawsuit being filed to evict the borrower if the borrower has not vacated the premises 
At any point during these proceedings, the borrower is usually in the position to keep the property if it pays off the loan and pays for foreclosure costs.
The borrower may be able to assert defenses and can stop a foreclosure temporarily by filing bankruptcy, which imposes an automatic stay that prevents a lender from proceeding forward without permission from the bankruptcy court. However, the borrower needs to be realistic in assessing these options since the laws in all states give lenders many rights when it comes to protecting their security interests.