COMMERCIAL REAL ESTATE, “INSTANT FORECLOSURE”
Commercial Real Estate owners in states such as Florida have operated with the knowledge that, should the economic winds turn against them, they could see some benefits from the real estate lender having to pursue its rights through the real estate foreclosure process. This process involves a proceeding in equity which includes an equity of redemption or a right by the owner to redeem his property prior to the conclusion of the foreclosure sale as well as the benefit of certain periods of time provided by the civil process for notice, answer and other parts of the formal proceeding as well as the forum to contest the claim.
Part of the foreclosure process which some owners look to in these times is the period of six months or longer that the process takes to complete, which gives them some additional time to arrange for other financing to fund the exercise of the owners equity of redemption.
Lenders in many commercial real estate transactions in States such as New York, require that the transaction documents reflect a dual collateralization. In addition to the mortgage on the commercial real estate, the lender takes a collateral interest by way of a pledge of the ownership of the borrowing entity. These document provisions generally allow the lender to proceed with the sale of the collateral (ownership in the borrowing entity) under the provisions of the Uniform Commercial Code. Florida law under Section 679.612 for instance provides for the non judicial sale of collateral with 10 days notice to the borrower.
While the period of time taken up by a typical commercial mortgage foreclosure proceeding may provide the real estate owner some limited period of time to arrange for alternate financing to allow him to exercise his equity of redemption, the 10 day notice period for a non judicial sale provided by the UCC affords almost no opportunity to obtain funds to redeem the property.
In addition to the loss of the property by the owner, this abbreviated process may result with the lender realizing a windfall in situations where the low loan-to-value ratios required by many nonstandard lenders provide for substantial unearned profits going to the lender.
Many courts such as those in Florida have tended to recharacterize these dual collateral loans as a transaction that was initially intended, a real estate mortgage loan, requiring completion of the equitable mortgage foreclosure process. But as with most any situation, the outcome can be fact specific and one or more courts have upheld the nonjudicial sales in these dual collateral transactions.
If things “go south” with your commercial real estate, the existence of this type of dual collateral documentation should put you on notice that you may be defending this type of claim by the lender.
Perry Douglas West, Esq . Cocoa, Florida . www.perrydouglaswest.com
