Commercial Lending: Practical Considerations and Loan Enforcement, Foreclosure, and Asset Recovery
Commercial lending serves as the lifeblood of businesses and real estate ventures, providing the necessary financial resources for growth and expansion. However, navigating the landscape of commercial lending requires a deep understanding of various legal aspects, including mortgage foreclosure, enforcement of security interests, assignment of rents, and the Florida Commercial Real Estate Receivership Act. As an attorney and mediator who often handles commercial lending cases, I’ll explore these crucial components of commercial lending, shedding light on their significance and implications for lenders, borrowers, and other stakeholders in this article. I’ll also touch on when, and why alternative dispute resolution like mediation can be a good option for commercial lending lawsuits.
I first began handling foreclosure cases as an associate at Rogers, Towers in Jacksonville 1990. I continued handling foreclosure cases along with other types of cases until 2008 when the foreclosure crisis occurred. From 2008 to 2022, I represented numerous local and regional banks, including BB&T, now Truist, in commercial foreclosure and asset recovery cases, which comprised approximately 80 percent of my caseload. I’ve been a Florida Supreme Court Approved Circuit Civil Mediator since 2008 and shifted the primary focus of my practice to mediation in 2021.
Commercial Lending: Helping to Build Businesses
Commercial lending encompasses the provision of financial resources to businesses for a variety of purposes, such as real estate acquisitions, property development, and operational needs. Lenders, typically banks or financial institutions, assess the creditworthiness of borrowers and evaluate the risks associated with the proposed ventures before extending loans. These loans are customized with specific terms, interest rates, and repayment structures to suit the unique requirements of borrowers and their projects.
The Common Issue of Loan Defaults
Unfortunately, loan defaults are a reality of commercial lending. Most loan defaults are payment defaults, meaning the borrower has failed to make the loan payments as agreed in the loan documents. When a payment default occurs, the lender may declare a default and accelerate the remaining loan indebtedness. Acceleration of all sums that remain due under the loan is dependent upon the lender’s right to do so.
Under Florida law, there is no right to accelerate the remaining indebtedness and declare the full loan amount due as a matter of law. However, almost all modern commercial notes and mortgages contain an acceleration clause entitling the lender to declare a default when it occurs and demand that the borrower pay the entire remaining loan indebtedness. Individuals who make mortgage loans sometimes overlook this important provision. In the absence of an acceleration clause, the lender may only sue for missed payments as they become due. Modern commercial loans, however, invariably contain an acceleration provision.
Other Causes for Default
Not all loan defaults involve the failure to make loan payments in accordance with the provisions of the loan documents. On commercial loans, in addition to making loan payments, usually in monthly installments, the borrower is often required to maintain insurance and pay real estate taxes owed on the property. Unlike residential loans, escrow accounts are typically not established on commercial loans, so the borrower must pay premiums on insurance covering the property for hazards such as loss by fire, and real estate taxes independent of loan payments. The lender is named as the loss payee on the insurance policy and will receive notification from the insurer if the insurance premiums are not paid. The borrower is usually required to periodically provide proof of insurance coverage and payment of real estate taxes to the lender under the loan documents.
The lender has access to public records through which it can easily determine whether the borrower has paid the real estate taxes. The mortgage and other loan documents commonly contain language allowing the lender to pay the real estate taxes and insurance premiums if the borrower fails to do so and add the expense to the borrower’s account. Lenders are particularly wary of unpaid real estate taxes. In Florida, the borrower’s failure to pay real estate taxes will result in the issuance of a tax lien certificate. After two years from April 1 of the year that the tax certificate is issued, the owner of the tax lien certificate may apply for a tax deed sale at which the mortgage lien could be extinguished. The borrower may also be required to periodically furnish the lender with updated financial statements and tax returns over the duration of the loan. In the event the borrower fails to do so, or the borrower’s financial condition dramatically worsens, many commercial mortgages contain provisions permitting the lender to deem itself “insecure” and declare a loan default.
Remedies Available to Lenders in a Default
When a loan default occurs, mortgage foreclosure and the enforcement of security interests in personal property are legal remedies available to the lender. Mortgage foreclosure is a legal process initiated by lenders to recover outstanding debt by seizing and selling the property used as collateral to satisfy the debt. The mortgage foreclose process in Florida is controlled by Chapter 702, Florida Statutes, as well as case law. A mortgage loan consists of a note and a mortgage which typically cross-reference each other. The note is the instrument that evidences the debt. The mortgage is the instrument that grants the lender a lien on the real property, but the borrower maintains ownership of the real property until such time as a certificate of title is issued to the successful bidder at a foreclosure sale.
Some states adhere to “title theory” under which the lender owns the real property, and the borrower enjoys possession and use of the real property if the loan requirements are met. It is important to note that Florida adheres to “lien theory” regarding mortgages. Many commercial mortgages contain provisions permitting the lender to enter upon the real property upon proper notice to the borrower/property owner. However, should the borrower/property owner refuse, the lender should seek a court order enforcing the entry provision in the mortgage. A lender who enters upon the real property after the borrower/property owner’s refusal does so at its peril and may be liable for trespass under Florida law.
A mortgage note is a negotiable instrument that is enforceable by the holder of the original note. Under Florida law, the lender must file a certificate in the foreclosure case certifying that it is the owner and holder of the note. See Rule 1.115, Fla.R.Civ.P. and sec. 702.015, Florida Statutes (2023). If the lender is not in possession of the original note, it must include a count in the foreclosure complaint to reestablish a lost or stolen note.
Frequently, the lender will require personal guarantees on commercial loans, and additional collateral owned by the guarantors. Unless the guarantor(s) cure the loan default, the guarantors become liable for the entire mortgage indebtedness as if in the shoes of the borrower. In practice, the guarantors will be sued in the mortgage foreclosure case and pursued by the lender to pay any “deficiency,” or shortfall between the proceeds of the foreclosure sale and the amount due under the foreclosure judgment, plus post judgment interest. A foreclosure judgment will typically include not only the unpaid principal on the loan, but prejudgment interest, certain litigation costs, attorney’s fees, and amounts advanced by the lender to pay real estate taxes and insurance upon the borrower’s failure to do so. However, the borrower/guarantor is entitled to a credit against the judgment debt based upon the fair market value of the real property on the date of the foreclosure sale.
Enforcement of Interests in Personal Property
In addition to real estate, collateral for commercial loans often consists of furniture, fixtures, or equipment. Enforcement of security interests in such “personal property” may occur by foreclosure upon the collateral in a manner similar to foreclosure upon real property. Alternatively, the lender may seek to recover possession of and acquire ownership of the personal property by replevin.
In Florida, replevin is governed by Chapter 78, Florida Statutes, as well as case law. Replevin offers the lender the advantage of expedited recovery of the collateral. A count for replevin may be included in the foreclosure complaint. When asserting a cause of action for replevin, the lender is entitled to an expedited “show cause” hearing at which the court will decide which party, with reasonable probability, is entitled to possession of the personal property pending final adjudication of the claims of the parties. See sec. 78.067, Florida Statutes (2023). Replevin allows the lender to quickly gain possession of the collateral in the event there is any concern on the part of the lender that the borrower may damage or abscond with valuable collateral. It is noteworthy that the sale of loan collateral, or removal of loan collateral from the county, by the borrower, without consent of the lender, are criminal acts under Florida law. See Chapter 818, Florida Statutes (2023).
Assignment of Rents Provisions
Commercial mortgages routinely contain an assignment of rents clause. The assignment of rents is a contractual provision that enables lenders to collect and apply rental income generated by the mortgaged property towards the borrower’s outstanding debt. It establishes a direct relationship between the lender and tenants, granting lenders the right to collect rent directly if the borrower fails to meet their loan payments. This mechanism helps safeguard lenders’ interests by ensuring a consistent cash flow to offset the outstanding debt.
Assignment of rents clauses are enforceable under Florida law. See sec. 697.07, Florida Statutes (2023). Upon loan default, the lender may make written demand upon the borrower for all rents in the borrower’s possession or control at the time of the written demand and collected thereafter. In practice, it is important that the lender make demand for turnover of rents upon loan default, so that all rents collected thereafter must be turned over to the lender. Once the lender has declared a default and accelerated the remaining loan indebtedness, the borrower will almost always cease to make any loan payments and use the rent to fund the defense of the foreclosure action.
The Florida Commercial Real Estate Receivership Act
The Florida Commercial Real Estate Receivership Act is a comprehensive legislative framework that governs receivership in commercial real estate transactions within the state. It establishes clear rules and procedures, enhancing efficiency and ensuring equitable treatment for all parties involved. See Chapter 714, Florida Statutes (2023).
Under the FCERA, receivers can be appointed to take control of a property or business to preserve its value and address outstanding debt. Receivers act as fiduciaries, managing and safeguarding the assets under their control. They have the authority to collect rents, negotiate leases, and make necessary repairs or improvements to protect the property’s value.
The FCERA provides specific guidelines for the appointment and powers of receivers, the claims process, and the sale or disposition of receivership property. This framework helps protect the interests of lenders, borrowers, and other stakeholders by establishing clear rules and procedures for receivership proceedings. A detailed analysis of the FCERA may be found in the Florida Bar Journal. See Kendall Coffey and David Freedman, Florida’s New Commercial Real Estate Receivership Act: A Roadmap for Judges and Practitioners, Vol. 96, No. 1, page 18 (January/February 2022).
Understanding the interplay between mortgage foreclosure, enforcement of security interests, assignment of rents, and the FCERA is crucial for lenders, borrowers, and other stakeholders involved in commercial real estate transactions. These components often intersect and impact one another, shaping the outcomes and legal processes in commercial lending.
The FCERA complements these processes by establishing a structured framework for receivership. When receivership is initiated, a qualified individual is appointed as a receiver to take control of the property or business. Receivers act as fiduciaries and are responsible for managing and protecting the assets under their control. They have the authority to collect rents, negotiate leases, and make necessary repairs or improvements to preserve the property’s value. This helps protect lenders’ interests while ensuring the ongoing viability and preservation of the property or business.
Mediation: Another Option for Commercial Lending Litigation
Under sec. 44.102(2)(a)2., Florida Statutes (2023), an action filed to collect a debt is exempted from mandatory mediation. However, under sec. 44.102(2)(b), Florida Statutes (2023), the court has the discretion to refer any civil action to mediation for which mediation is not required. In my experience, courts are highly amenable to referring foreclosure and other asset recovery cases to mediation, and mediation of commercial lending lawsuits has proven to be an effective means of resolving disputed foreclosure and asset recovery cases.
Commercial Lending: A Complex Landscape
Commercial lending is a multifaceted endeavor that demands a comprehensive understanding of various legal aspects. Mortgage foreclosure, enforcement of security interests, assignment of rents, and the Florida Commercial Real Estate Receivership Act all play significant roles in the commercial lending landscape.
Lenders, borrowers, and other stakeholders must be well-versed in these aspects to navigate the complexities of commercial lending effectively. Seeking guidance from legal professionals with expertise in commercial lending, real estate, and relevant laws is essential to ensure compliance, protect interests, and maximize recovery in the event of default or financial distress. Mediation for commercial lending cases should also be considered.
By comprehending the interrelationships between mortgage foreclosure, security interests, assignment of rents, and the FCERA, participants in commercial lending can make informed decisions, safeguard their interests and contribute to the growth and success of businesses and real estate ventures.
About John McCorvey, Jr.
John McCorvey, Jr. is a Florida Supreme Court Certified Circuit Civil Mediator and an accomplished litigation attorney with an extensive background in commercial and real estate litigation, including an emphasis on creditors’ rights.