Understanding the Commercial Foreclosures Process

It’s not uncommon for businesses to fall into financial hardship. Falling behind on a mortgage payment can happen to businesses, too. Failing to meet a mortgage payment date or violating the terms of the loan in some other manner is a default. When a default occurs, a lender usually begins a foreclosure proceeding in an effort to resell the property and recoup the proceeds of the original loan. It’s a good idea to ask your lender how you can avoid the foreclosure process entirely before the matter is out of your hands.

The commercial foreclosures process is normally quite similar to the residential foreclosures process with just one difference – the appointing of a third-party receiver. But more on that in a moment.

Let’s first examine commercial foreclosure types.

Types of Commercial Foreclosures

Like their residential counterparts, commercial foreclosures are conducted in one of two ways – judicial or non-judicial process. The process used depends on where the property is. While several states allow both types of procedures, some only allow a judicial foreclosure process. The language and loan terms of the contract are also weighed.

What is a judicial foreclosure?

In judicial foreclosures, lenders must file against a borrower in a court of law asking for a judgment and order. The defendant, along with any other parties with a vested interest, will be given an allotment of time to respond and file an answer – usually around 20 to 30 days.

If no defendant files within the allotted time, the attorney for the lender asks the court for a judgment of foreclosure. Then, If defendants do respond within the timeframe, the process will normally go to trial. If the defendant loses, the courts enter judgment favoring the lender and the foreclosure is granted.

After a foreclosure is granted an order of sale is written. The property will then be sold to recoup the borrower’s debt.

What is a non-judicial foreclosure?

If the wording of the loan document contains a clause granting power of sale to the lender – and the state in which the property is located allows it – lenders can foreclose on commercial properties nonjudicially, or without the assistance of a court.

In a commercial foreclosures process, non-judicial foreclosures occur when the lender takes a series of steps according to the state’s laws without the assistance of a court. For instance, the bank or lending institution may mail a notice of loan default to the borrower(s), post public notices of the property’s foreclosure, and/or publish said notice in a local newspaper. The laws governing the commercial foreclosures process are different in each state.

What is a Receiver in the Commercial Foreclosures Process?

If a commercial property owner (borrower) defaults, lenders make every effort to ensure that the borrower:

  • Maintains the physical property in good condition
  • Continues to carry insurance on the property
  • Does not continue to collect rent or any other profit from the property without first putting the amounts toward their outstanding debt

Usually, commercial property mortgages contain a clause for the assignment of any profits in the event of foreclosure to the lending institution. This is where a “receiver” comes into play.

The lender asks the courts (in a judicial or non-judicial foreclosures process) to appoint a receiver. This individual’s job then is to take over management of the commercial property until the completion of the foreclosure. In some instances, a receiver will be responsible for the sale of the property.

How a Commercial Foreclosures Process Works

Whether as a judicial or non-judicial foreclosure, properties are often sold to the highest bidder. The sale’s proceeds go towards the mortgage debt.

If there are no bids at the sale, the lender bids. The lender can make a bid for any amount up to the amount currently owed. This amount includes the principal and interest of the original loan, as well as any late fees, attorney fees, trustee fees, or other costs.

Because this amount is already owed to the lender, the lender doesn’t actually pay anything. This is also known as a credit bid.

That said, sometimes after the appointment of a receiver, the foreclosure sale may not occur. In this instance, if the receiver has the permission of the court, lender, borrower(s), and anyone else with an interest in the property, he or she can sell the commercial property outside the foreclosure proceedings.

How to Avoid Commercial Foreclosures

If you’re a commercial borrower and you’ve defaulted on your mortgage – or you’re in danger of doing so – contacting your lender at the first sign of trouble is crucial. Some lenders may work with you to avoid the commercial foreclosures process. For instance, some lenders may allow an adjusted repayment plan allowing you to catch up on your payments according to an agreed-upon schedule.

It’s always best to be communicative with your lender. If a commercial foreclosures process goes too far, it may be too late.