The only major difference between a commercial foreclosure and a residential foreclosure is the borrower. In the case of a residence, the borrower is a homeowner. With a commercial foreclosure, the borrower is more likely to be a business. In either case, the lender closes the borrower's rights to the property by taking possession and reselling it to recover the outstanding debt.
Residential Foreclosure
A residential foreclosure occurs after a homeowner defaults on a home loan. If no agreement is reached to cure the default, the lender bank will began foreclosure proceedings. In a foreclosure, the owner is not immediately evicted. Instead, the following formal steps will take place:
- The bank serves a Notice of Intent to Foreclose to the homeowner. This notice is sent through a sheriff or by certified mail.
- The bank begins court action to foreclose.
- The bank publishes legal notices in local papers.
- The notice period expires and if no agreement between lender and homeowner is reached, the court will hold a hearing on the bank's claim.
- The court issues order to allow the bank to foreclose.
- The bank publishes the legal notice of actual foreclosure sale and advertisements in local papers.
- If no payment arrangement is reached at this point, the the house is sold at a bank auction to the highest bidder. After the sale and closing, the new owner can go to court to evict the former owner. In some cases, the new owner may allow the former owner to remain as a renting tenant.
Commercial Foreclosure
As in a residential foreclosure, the steps are similar. The owner of the commercial property defaults on the bank loan and the bank steps begins legal proceedings to seize the property per state laws. However, a commercial property may have several tenant businesses who hold commercial leases. In this case, the basic rule of "first in time, first in right" comes into play. This premise states that if lender recorded the commercial mortgage before any lease is signed, the lease is nullified in a foreclosure. The lender can then do whatever it wants with the property, including selling the property, re-leasing to the current occupants, or leasing to a new business. However, certain leases include conditions that protect tenants in case the property owner forecloses.
What Happens to Commercial Leases?
Some leases or lease agreements define what will happen in case of a foreclosures. They contain clauses on subordination, non-disturbance and attornment. Attornment allows a tenant to remain with a new landlord. In these types of leases, the lender has already agreed to not evict the tenant as long as the tenant has complied with all the lease terms, therefore a compliant tenant should not be adversely affected by a subsequent foreclosure.
Also, unlike in a residential foreclosure, a lending bank that seizes a commercial property has less incentive to evict and resell as the bank already has paying tenants who will bring income to the property. A new owner who purchases the property at auction may not want to risk numerous vacancies and may be more likely to come to terms with the existing tenant(s).
Find an Attorney
If you are involved with a commercial foreclosure, either as an owner, a tenant or a prospective buyer, state's foreclosure laws and competing lease terms may create a complicated situation. Consult with an experienced attorney who is knowledgeable with foreclosure and contact laws to avoid any possible obstacles.
