Legal Issues with a Delinquent Commercial Mortgage

When a business owner obtains a commercial mortgage to purchase property, he signs a promissory note and pledges the property as collateral by signing a deed of trust, mortgage or security deed.  Depending upon the type of property and the nature of the business, the business owner may also be required to sign an assignment of rents.

What Happens If Commercial Mortgage Payments Are Delinquent

If a business owner is delinquent on his mortgage payments, the lender has a number of options that it will pursue to collect the debt.

• Collection Efforts – Once a business owner misses a commercial mortgage payment, the lender will call and send letters in an effort to collect the debt.  If the business owner fails to respond, the lender’s collection efforts will become more aggressive and may include contacting the guarantor’s on the loan.
• Assignment of Rents – If the business owner leases any portion of the property that is the collateral for the commercial mortgage and the business owner signed an assignment of rents, the lender has the right to demand that the tenants or lessees pay their rent directly to the lender.
• Foreclosure – If the lender’s collection efforts have been unsuccessful or efforts at negotiating a workout have failed, the lender will begin foreclosure proceedings.  Although the foreclosure process is governed by state law, the general steps are very similar.

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  • Notice of Default – Once a business owner has missed several commercial mortgage payments, the lender will serve him with a notice of default.  The notice of default will set forth the total amount due in order to reinstate the loan.  If the loan has not been reinstated by a specified date, the lender will begin foreclosure proceedings.
  • Judicial Foreclosure – In some states, the lender may only pursue a judicial foreclosure.  A judicial foreclosure in a lawsuit whereby the lender is seeking to obtain an order authorizing it to sell the property.
  • Non-Judicial Foreclosure – If the property is located in a state where non-judicial foreclosures are authorized and the lender elects to pursue a non-judicial foreclosure, the lender may proceed to sell the property without first obtaining a court order.  The non-judicial foreclosure process is usually set forth in the security deed, deed of trust, or mortgage.  If it is not, the lender must follow the non-judicial foreclosure process set forth in the applicable state statute.

• Eviction – Once the foreclosure sale has taken place, the lender will begin eviction proceedings if the business owner has not already vacated the premises.  Evictions are governed by state law.

Getting Legal Help

If you are behind on your commercial mortgage payments, you should not ignore the problem. 

Your attorney will help you decide whether to:

• File bankruptcy;
• Negotiate a workout with the lender; or
• Sell the property.

You should explore all your options with the assistance of an experienced foreclosure attorney.