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Practising Law Institute, 1999
Published in Commercial and Real Estate Financing: What Borrowers and Lenders Need To Know Now
©Miller Shakman & Beem and Diane F. Klotnia
Commercial Real Estate
Foreclosure Checklist
by Diane F. Klotnia
I. Pre-Enforcement Considerations
- Know the applicable state law.
Foreclosure laws can vary significantly from state to state. The location of the property will determine what state’s laws will govern any foreclosure action. Become familiar with those laws since they will influence strategy and other decision-making throughout the process. If the mortgage relates to property outside your state and you are not familiar with that state's laws, consider retaining local counsel early in the process to assist you.
- Review all loan documents.
Review the lender’s entire loan file for relevant documents and interview the loan officer in charge of the file. Common documents include the following:
- Basic loan documents
Note(s)
Mortgage(s)
All applicable amendments or modifications
Co-lender or participation
agreements if the loan is participated
- Other common loan documents
Assignment of rents
Cross-Collateralization agreement
Security agreement
Guarantees
- Determine whether the mortgagor and borrower are the same. If not, confirm that the documents include cross-collateralization/cross-default agreement.
- Guaranty
- Confirm recording of the mortgage(s)
Confirm that the mortgagee has properly recorded each mortgage to be foreclosed.
- UCC Filings for other collateral
Confirm that UCC financing statements have been filed and are in effect for personal property, fixtures, and other collateral.
- Default Notice
- Determine whether there has been a default under the loan documents.
The most common default, of course, is the non-payment of principal and interest. There may be other defaults. For example, a borrower who is not paying principal and interest also likely has not paid taxes or insurance, which are often requirements of the loan documents.
- Determine whether the mortgagee is required under the loan documents or state law to provide notice of default to the borrower/mortgagor.
- If notice of default is required, determine whether all notice requirements have been complied with.
- Review prior default letters and responses, if any.
Frequently, the mortgagee will already have provided some form of notice to the borrower of its defaults under the loan documents. You need to review those letters. Make sure that the notices cover all the defaults or include a catch-all, and that the mortgagee has not waived any of its rights.
- If there are multiple mortgages, confirm that all have been included in the prior notices.
- Determine whether the borrower has made any payments after notice.
- Determine whether the mortgagee has taken any action that could be deemed to constitute waiver of any prior notices or defaults.
- Determine whether notice was sent in the proper form to the proper parties, including guarantors, if any.
Notice provisions -- timing, form and parties to receive notice -- are often identified in the documents. Be sure that the borrower or others entitled to notice have not notified the mortgagee of any changes as to who is to receive notice or where notice is to be sent.
- Send new or additional notice, if needed, in accordance with loan documents and state law.
- Consider effect of cure period, if any.
- Review other communications between mortgagee, borrower and mortgagor.
Determine whether any prior communication may constitute a modification, settlement or waiver by the mortgagee. Consider defenses that the mortgagor/borrower may raise.
- Review status of the property title: Minutes of Foreclosure
- Obtain minutes of foreclosure from the title company.
Be sure to let the title company know that you require the minutes for a possible foreclosure and that you need a listing of all necessary parties.
- Confirm that the legal description in the title report is the same as the legal description in the loan documents.
- Determine whether there are other lien claimants and whether their liens may be superior to that of the mortgagee.
Common lien claimants include tax lien claimants and mechanic's lien claimants.
- Determine whether there are exceptions to title insurance and whether the title company will remove them.
Bottom line. Keep the title company informed. Talk to the title officer. Let the title officer know what you are doing and find out what the title company will need to give clean title to a purchaser at a foreclosure sale.
- Determine whether the property is occupied by tenants or other third-parties.
Find out whether the property is occupied by third parties and whether their right to possession of the property is governed by a written lease or not. Review any written leases or other agreements, including, for example, subordination, non-disturbance and attornment agreements, to determine what rights the occupant and the lender have in the event of a foreclosure. If an occupant's interest in the property can be foreclosed, the mortgagee needs to decide whether or not to include the occupant as a party to a foreclosure proceeding. That decision, again, will depend on the applicable state laws. For example, under Illinois law, a supplemental proceeding can be filed against an occupant of the property who has not been personally named in the party to the foreclosure at any time during the pendency of the proceedings and up to 90 days after the date of the order confirming the sale.
- Obtain a current appraisal of the property.
Make sure that you have a reasonably current appraisal. The appraised value of the property may have changed dramatically since the execution of the loan documents. The current appraised value may affect how the mortgagee proceeds.
- Obtain a Phase I Environmental report.
The environmental status of the property may also affect how the mortgagee proceeds, including, for example, whether the mortgagee will be willing to take title at the end of the day.
II. Enforcement -- Foreclosure
- Whether foreclosure is judicial or non-judicial depends on state law.
State statute may provide a road map to pursuing foreclosure. The Illinois Mortgage Foreclosure Law, for example, provides detailed information concerning the allegations that must be included in a foreclosure complaint and the form of the judgment of foreclosure.
- Consider available remedies.
Remedies available also depend on state law. For example, under Illinois law, a mortgagee can recover the property without waiving its right to recover the deficiency from the borrower. That is not true in all states. Some states, such as California, limit the mortgagee to a single recovery -- the property or the amount in default. In addition to foreclosing on the property, other actions that may be available include, for example, claims for deficiency, claims on the note, and claims on the guarantee, if any.
- Other considerations during foreclosure.
- Mortgagee in possession v. receiver
Some of the primary considerations during foreclosure are how to preserve the property’s value and how to collect rents for the benefit of the mortgagee. The focus is on control -- that is, reducing or eliminating the mortgagor's control over the property as soon as possible by placing the mortgagee in possession of the property or having a receiver appointed.
Some states may permit a party to exercise an assignment of rents outside of a foreclosure proceeding; others will require that a receiver be appointed or the mortgagee placed in possession of the property before the mortgagee can collect rents.
- Claims against guarantors.
Another consideration is whether there are guaranty claims that can be pursued.
- Consider negotiating a consensual resolution.
Some common consensual resolutions include:
- Work out/Restructuring of Loan
- Deed-in-lieu of foreclosure
Under Illinois law, the mortgagee, with the consent of the mortgagor, takes title to the property subject to any other claims or liens affecting the property. Acceptance of a deed-in-lieu relieves from personal liability all persons who may owe payment or the performance of other obligations secured by the mortgage except to the extent that person agrees not to be relieved in an instrument executed contemporaneously.
- Consent foreclosure
Unlike the deed-in-lieu option, a consent foreclosure forecloses the interests of the mortgagor and any other lien claimant, other than the United States (which can be foreclosed only through a judicial sale). In Illinois, requires that a judicial proceeding be initiated and mortgagee must waive any rights to a personal judgment for deficiency against the mortgagor or any other person liable for the indebtedness or other obligations secured by the mortgage.
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