Foreclosure of Commercial Properties: Determining Effect of Property Transfer
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When commercial properties are foreclosed, both federal and state laws come into play. State laws vary considerably, and the effect of a property transfer on the buyer of foreclosed property depends on those laws and the way the sale was originally structured. Some of the effects include the disposition of existing commercial tenant leases and settlement of the amount due.
Recourse vs. Non-Recourse
State laws on commercial foreclosures can vary widely. For example, California has anti-deficiency laws that may exempt the property owner from incurring personal liability. In other words, the only option the lender has for recovering the loan is to take the property back. Many of the other states do not have a non-recourse law that protects the owner from personal liability. In a non-recourse state the lender can pursue the borrower personally if the property sale does not bring in at least as much as the outstanding loan amount.
There are two general ways the lender may pursue remedies under laws addressing commercial foreclosures:
- file a lawsuit to obtain a court-ordered judicial foreclosure allowing the property to be sold or
- follow deed of trust provisions allowing a non-judicial foreclosure leading to a property sale.
Property is usually sold at public auction. If no one bids enough for the property, the mortgage holder can buy the property back. There are tax consequences to both recourse and non-recourse loans.
State Laws Affect Disposition of Tenant Leases
One of the effects of a property transfer when there has been a commercial property foreclosure is on the existing commercial leases. The rights of the lender will be determined by the state where the property is located and the terms of the mortgage or deed of trust. In some states, the foreclosure will terminate the lease if the mortgage was recorded before the lease was created. If the lease is dated after the mortgage, then the lender may be able to continue the lease. If the mortgage or a separate agreement exists that establishes procedures for lease termination or continuation in the event of foreclosure, the provisions must be followed.
Foreclosures of commercial properties are complex, and the full effects depend on factors such as state of residence, mortgage provisions, separate agreements, leases in effect at the time of foreclosure and the circumstances surrounding the foreclosure.
Always Consult an Attorney
Whether you are a lender, landlord or tenant, it is important to consult an attorney about the foreclosure process and possible effects. An attorney can advise you on your legal rights and how to minimize possible negative effects.