Commercial Real Estate Foreclosure in Judicial Foreclosure States: What Options Does a Lender Have?

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At Kirkland Capital Group, we carefully review every loan through our due diligence process. Most loans that are submitted do not meet our standards. However, despite our proactive approach, there is still a possibility of foreclosure or property takeover. Our main priority throughout the entire process, including due diligence, loan servicing, and, if needed, foreclosure or property takeover, is to protect investor principal. 

To ensure the protection of the principal, a standard foreclosure process can be utilized. However, there are alternative options available, such as UCC foreclosure, forbearance, loan modification, or a deed in lieu of foreclosure. These options offer the borrower a chance to address their financial challenges while still meeting their mortgage obligation. 

Judicial Commercial Foreclosure 

Some states have laws allowing nonjudicial foreclosure, which is considered a more efficient process, while other states only allow judicial foreclosure. Unlike nonjudicial foreclosures, which don't involve the court, judicial foreclosure involves a formal legal procedure overseen by the court, requiring the lender to file a lawsuit and follow specific procedures to recover unpaid mortgage debt. 

Certain states like Illinois, Maryland, and New Jersey have implemented fast foreclosure laws to aid commercial lenders in quickly foreclosing on vacant properties. These laws tackle blight resulting from neglected commercial properties and expedite revitalization efforts. By reducing the lengthy judicial process, the fast-track procedure streamlines foreclosure, enabling lenders to regain control of the property promptly. 

“In many judicial states, commercial foreclosure has fewer restrictions than a residential mortgage foreclosure.”

In many judicial states, commercial foreclosure has fewer restrictions than residential mortgage foreclosure. This accelerates the process. Residential mortgages usually require a 90-day pre-foreclosure notice, while commercial loans and mortgages require as little as 20-30 days' notice. Some states' residential mortgage laws require lenders to meet with the borrower and attempt to reach a fair agreement, including mortgage modification. However, commercial mortgages do not require these meetings, so while negotiation is possible, it is not legally mandated. 

Cooperative Options to a Judicial Real Estate Foreclosure 

As a commercial mortgage lender, we have various options available to expedite the mortgage debt recovery process and bypass the judicial system. By collaborating with property owners, we can explore alternative solutions to potentially prevent foreclosure, allowing them to address their financial challenges while also protecting our investment. 

Forbearance Agreement 

A forbearance agreement is a negotiated plan between a borrower and the lender that adjusts payments, default interest, or late fees to help a borrower overcome a period of difficulty. This alternative to foreclosure gives borrowers the chance to address their financial issues while keeping their property.  

“The most valuable part of a forbearance agreement is our agreement not to initiate foreclosure during the forbearance period.”

The most valuable part of a forbearance agreement is our agreement not to initiate foreclosure during the forbearance period. This provides the borrower with peace of mind, allowing them to focus on resolving their financial issues without the fear of losing their property. Ultimately, the loan and interest due is paid back, either through accelerated payments or full payoff. 

Modify the Existing Mortgage 

Modifying the existing mortgage with the borrower is a viable option when they have a good amount of equity in the property. If they have had trouble making payments but can prove they have resolved the issue, the past due amounts can be added to the principal. We may request updated income statements, tax returns, and any other financial information that shows their ability to meet the modified mortgage terms with the higher payment. 

Deed in Lieu of Foreclosure 

A deed in lieu of foreclosure is a legal agreement between a borrower and a lender that allows for the transfer of ownership of a commercial property to the lender to fulfill the outstanding mortgage debt, providing an alternative to the conventional foreclosure process. 

“A deed in lieu helps borrowers by avoiding the negative impact of foreclosure on their credit.”

A deed in lieu helps borrowers by avoiding the negative impact of foreclosure on their credit. We benefit from a deed in lieu by avoiding the long and expensive foreclosure process. We gain ownership of the property faster and have more control over its condition during the transfer. 

Before accepting a deed in lieu, it is important to consider potential drawbacks such as the presence of junior liens or property restrictions. Additionally, the property value may be lower than the remaining mortgage debt, resulting in a deficiency that would require legal action. 

UCC Real Estate Foreclosure 

Borrowers are required to sign a Uniform Commercial Code (UCC) entity pledge for all our loans. Therefore, if a borrower is not willing to explore more cooperative non-foreclosure options, a UCC Real Estate Foreclosure option is available. This foreclosure process provides a framework to streamline and expedite commercial foreclosure proceedings. 

UCC Real Estate Foreclosure differs from traditional judicial foreclosure as it allows lenders to avoid the court system, resulting in time savings as well as reduced costs. Instead, lenders can enforce their rights under the UCC by notifying the borrower of the outstanding debt amount, along with the opportunity to redeem the property within a specific timeframe. Should the borrower fail to redeem, the lender proceeds with a public sale or auction of the property to recover the amount owed. 

We Have Options 

Regardless of whether a property is in a judicial or non-judicial foreclosure state, the first approach is exploring cooperative alternatives such as forbearance and loan modification. These options frequently enable the borrower to resolve the problem. If other options are not successful and a deed in lieu of foreclosure is not possible, there is still the option of a UCC Real Estate Foreclosure. 

Reach out to talk further about how we handle foreclosure issues or about alternative investments, private lending, risk, real estate, or the Kirkland Income Fund.