Commercial Property Herald

Commercial Foreclosure Basics in California - Part 2 An Update

I am often asked by borrowers whether of not a lender can sue the borrower for any amount that is owed on the loan, over and above the sale price received at a private sale.  Well, there are many, "it depends."  The first depend is, "it depends what state the property is located in."  First and foremost, you have to be aware that each state has different rules and procedures and I am not qualified to advise in any state other than Califonia, so this post is limited to property and laws in California.  However, while I am only referening certain laws and rules in California, the are many similarities from state-to-state.

In very short summary, if the lender proceeds with a NJF, (non-judicial foreclosure), a procedure provided by California law and the property is sold as a result, the lender cannot proceed against the borrower if there is any deficiency.  By deficiency, I mean that the property sold for less then what was owing on the secured loan.

In California there are two procedures generally used by lenders and trustees when foreclosing on the collateral given by a defaulting borrower, (1) judicial foreclosure, and (2) non-judicial foreclosure.  In a commercial context, in California both procedures are used.

Often, the lender proceeds with a non-judicial foreclosure to begin the statutory process allowing the lender to foreclose on the property, usually without the involvment of an attorney.  The non-judicial foreclosure process is relatively quick and inexpensive as compared to a judicial foreclosure and is also typically used in residential foreclosures.

Concurrently with or a short time after the commencemnet of the non-judicial foreclosure process, a lender will often file with the court, a judicial foreclosure lawsuit, seeking an immediate appointment by the court of a receiver.  Usually, the main purpose of the receiver is to manage the property and collect rents during the pendency of and until the sale of the property as a result of the non-judicial foreclosure.  This will preserve and protect the lender's collateral, to the extent possible. Usually, the judicial foreclosure lawsuit remains open and active for a period of time beyond the sale of the property at a non-judicial foreclosure in order to allow the receiver to finalize the administration of the property while the receiver was responsible for managing the property and upon the final report of the receiver, the lawsuit is usually dismissed.

However, there are some occassions where the judicial foreclosure lawsuit is not dismissed and the lender can continue to proceed with a lawsuit, seeking damages against the borrower and, in some cases, a guarantor.  A lender will continue to proceed against the borrower and/or the guarantor including instances in which the lender believes that the borrower or its principal was involved in some sort of fraud relating to the loan or missapropriation of rents that part of the lenders collateral.  Continuing actions may also include action against guarantors who fully or partially guaranteed the loans or were otherwise subject to certain carve-out rules.t

Following posts will address The Bird Rule and carve-out exceptions to limited guarantees.

Please take care when using the above information.  As in most cases, the devil is in the details and the exceptions are what keeps lawyers employed.  A thorough analysis by your attorney should be done before you act on any of the advice contained herein.

 

When does No, mean Yes in a commercial Lease?

A local court recently rules that a landlord impliedly waived the tenant's obligation to pay rent by not insisting that rent be paid on time.  While there were many more facts, the salient facts were as follows:

• The lease had language provided, "No waiver of any default of either party hereunder shall be implied from any acceptance by Landlord or delivery by Tenant (as the case may be) of any rent or other payments due hereunder or any omission by the non-defaulting party to take any action on account of such default:
• Although the lease did not require it, the landlord agreed to do some ADA improvements in the common area and as required by the plans for the tenant improvements approved by the city;
• The lease provided for early possession of the premises by the tenant to do its own tenant improvements.  Landlord was to do no work.
• The Lease provided for a date certain for the commencement of the payment of rent, whether the tenant completed its T.I.'s or not.
• Tenant never completed its T.I., and about 14 months after lease and rent commencement (landlord applied about 6 months T.I. allowance to rents and 1st months rents, 1/2 months rent paid after T.I. allowance was applied and approximately one months rent paid after month 12), landlord commenced suit to collect rents;
• Lease provides that any amendment must be in writing;
• There was no testimony or any evidence that there was any agreement to waive rents;
• Defendant testified that he thought that he did not have to pay rents until he moved into the premises although he did admit that he didn't read the lease at the time that he signed it.
• The parties stipulated that the city would not give the tenant an occupancy permit unless the ADA improvements were completed;
  

The court found that, the landlord waived rents and the tenant's other Lease obligations, notwithstanding the language of the lease and the fact that there was no evidence of an explicit waiver or any agreement to waive rents. The court considered the landlord's failure to pursue rents sooner was a waiver.

An Advantage of a Pre-Judgment Writ of Attachment

When considering pursuing a collection action against a tenant debor and upon filing the complaint, the landlord or Plaintiff should consider filing an Application for Pre-Judgment Writ of Attachment.  If granted by the court, the landlord can attach assets of the tenant, immediately and  prior to obtaining judgment in order to secure payment on the judgment, when the landlord eventually obtains the judgment.  One of the significant advantages of the Pre-judgment Writ of Attachment is that the landlord can, prior to obtaining judgment, do discovery to determine the assets of the tenant, they type of discovery which is not normally relevant until after the landlord obtains judgment.

Howard Kline will be Speaking at RIAOC Orange County, April 21, 2009

I will be speaking at the Realty Investment Association of California (RIAOC) on Tuesday morning, April 21, 2009. At the Garden Grove Elk’s Lodge. The address is 11551 Trask Avenue, at the corner of Newhope.

I will be speaking on Hot Topics relevant to commercial brokers and property managers in a down economy, which I expect to worsen over the next year, that is the economy, not my speaking. A little sneak peak on the topics that I have chosen will include:

1. Subordination, Attornment and Non-Disturbance Agreement in leases - Now becoming more relevant to tenants in an age for commercial foreclosures
2. Guarantor liability on commercial loans, even in the event of non-judicial foreclosures. We see more of them then in the 90's due to the prevalence of property being held in LLC's.
3. Negotiating requirements of some deep pocket and/or recession proof retail tenants.
4. Effect of Landlord Bankruptcy