An Overview of Commercial Foreclosure Procedure

The commercial foreclosure process is very similar to the residential foreclosure process.  State law governs the procedures a lender must follow in order to foreclose a commercial mortgage.  Although the particular foreclosure procedures vary from state to state, following is a general overview of the commercial foreclosure process.

Step One – Notice of Default

Once a business owner misses payments or otherwise defaults on a commercial mortgage, the lender will send him a notice of default.  The notice of default is usually sent via certified mail and will include the total amount which must be paid by the borrower in order to reinstate the loan.  The notice of default will also set forth the date by which the loan must be reinstated in order to avoid foreclosure.

Step Two – Notice of Acceleration

If the borrower fails to reinstate the loan, the lender will send him a notice of acceleration.  The notice of acceleration demands that payment in full of the total amount due on the loan be made within a specified period of time to avoid foreclosure.  The notice of acceleration is usually mailed via certified mail. 

Step Three – Notice of Foreclosure

The commercial lender must notify the borrower of its intention to foreclose.  The notice must contain the total amount due on the loan, the date, time, and location of the foreclosure sale, and must identify the instrument by which it claims the right to foreclose.  In most states, the notice of foreclosure must also be published in the legal organ of the county in which the property is located.

Step Four – Foreclosure Sale

After all statutory notice provisions have been met, the lender may proceed with the foreclosure.  The two most common forms of foreclosure are:

• Judicial Foreclosure; and
• Non-judicial Foreclosure.

Judicial Foreclosure – A lender initiates a judicial foreclosure by filing a lawsuit.  The lawsuit must set forth several facts including:

• That the lender has a security interest in property of the business owner;
• The identity and location of the property in question;
• That the business owner has defaulted on his obligation;
• The date of the default;
• The amount of the delinquency;
• The total amount owed; and
• A request for an order authorizing the lender to foreclosure.

If the lender is successful in obtaining an order authorizing the foreclosure, the property will be sold at a sheriff’s sale and the net proceeds of the sale will be turned over to the lender to pay off the loan.  Any excess proceeds will be distributed to the property owner.

Non-judicial Foreclosure - In states where non-judicial foreclosures are authorized, a lender is not required to obtain a court order before it can foreclose.  After satisfying all statutory notice provisions, the lender may proceed with a non-judicial foreclose.  A non-judicial foreclosure is an auction type sale which usually takes place on the courthouse steps in the county where the property is located.  The property is sold to the highest bidder; if there are no bids, the lender is automatically deemed to be the highest bidder and takes possession of the property.

Step Five – Eviction

If the business owner or his tenants have not vacated the property, the lender will initiate eviction proceedings.  State law governs the eviction process.

Step Six – Deficiency Judgment

In some instances, a lender may seek a deficiency judgment to recoup its losses if the property is sold at foreclosure for less than what was owed on the commercial mortgage.  If a lender obtains a deficiency judgment, it may garnish the future wages and levy on the property of the business owner and any guarantors on the loan. 

Getting Legal Help

If you are facing a commercial foreclosure and have questions about the process or your rights, contact a qualified commercial foreclosure attorney in your area.  An experienced commercial foreclosure attorney can explain the law and recommend an appropriate course of action.