It may happen that a lender finds themselves wanting to cancel a relationship they have with a borrower, but cannot start the foreclosure process because payments are current. While a lender may not start the foreclosure process simply because they do not like the tenants, there are grounds other than late payments that could trigger the foreclosure process. Overall, the causes are going to be determined by the terms of the loan itself — it will be difficult to foreclose a property for a term that was not already included in the agreement. A violation of terms already set in place may start the foreclosure process. Some of the most common term violations that may lead a lender to foreclose a commercial property are failure to pay property taxes or failure to obtain insurance.
Common Reasons to Foreclose Commercial Property Other Than Late Payments
Failure to Pay Property Taxes: It is common for property taxes to be included in the commercial loan. If taxes are paid separately, the borrower has the obligation to pay those fees to the government. If a borrower fails to pay their taxes, and the lender pays instead, a lender might foreclose if the borrower fails to pay it back.
Failure to Obtain Commercial Property Insurance: If a term of the loan requires the borrower to keep their insurance up-to-date, then a lender might foreclose if the borrower does not have commercial property insurance.
Failure to Maintain Debt Service Coverage Ratio: A common term of commercial property loans is that the borrower must maintain a certain debt service coverage ratio. In simplest terms, this is the business’ net operating income over debt service. If a business finds that it is unable to make the necessary income to reliably pay its debts, a lender might foreclose a property before the borrower has a chance to miss his payments.
Satisfactory Condition: A lender might include the property’s condition as a clause in their loan agreement. This posits that the property must be kept in satisfactory condition. This might be specified further, for instance, a restaurant property might require a satisfactory code of health. Reckless damage may be enough for a lender to foreclose a property if there is a term for it in the loan agreement.
Clerical Error: It sometimes happens that a lender will foreclose a commercial property due to a clerical error. For instance, if the loan changed hands, the borrower may have been making payments to the wrong bank. It is better for lenders to attempt to solve the clerical error before foreclosing a property.
Keep Your Team Educated About Foreclosure Law
At Total Lender Solutions, we advocate for lenders looking to maximize recoveries on defaulted loans. For over 15 years, our team of highly experienced real estate professionals and legal experts has transformed complicated processes into clear resolutions for institutional and private lenders. We work as a vigorous extension of your team to provide comprehensive solutions and seamless communication, from pre-foreclosure and notice of default to the final sale phase. Our dedication and persistence when it comes to the foreclosure process ensures that our clients feel confident in reaching a successful outcome. Contact us today.
