|
The common
understanding of a
non-recourse
commercial real
estate loan is that
an individual has
little to no
personal liability
should a default
occur. However, this
isn't always the
case. An individual
signing on behalf of
the borrowing
entity, Sponsor,
isn't always immune
from personal
liability.
Non-recourse loans
have exceptions
within the loan
documents that
essentially transfer
personal liability
to the Sponsor for
certain "bad boy"
behaviors. Or more
specifically, there
are personal
guarantees required
with non-recourse
loans.
Not only is the
Sponsor personally
liable for bad boy
behaviors,
individuals or
entities providing
limited guaranties
or indemnification
can still be liable.
Typical exceptions
include*:
Losses for fraud or
intentional
misrepresentation
Losses for waste
Losses for
misappropriation of
tenant security
deposits or rents
Specific performance
of the loan
documents
To foreclose and
obtain title to the
collateral
To enforce any
guaranty
To enforce any
indemnity
To enforce any
environmental
indemnity
To enforce any
release of liability
To obtain a receiver
To enforce the
assignment of leases
and rents
Losses regarding
required insurance
of the collateral
Losses from the
failure to pay over
insurance proceeds
Losses from the
failure to pay over
condemnation awards
Voluntary bankruptcy
or insolvency
Involuntary
bankruptcy or
insolvency
While these are
typical carve outs,
each lender's loan
documents will
differ and each
state will have
their own "legal"
interpretation of
these carve outs.
Examples where carve
outs can affect
Sponsor liability
include*:
The lender may be
able to sue the
Sponsor if fraud or
material
misrepresentation
affects the selling
price of an asset
creating a
deficiency of
proceeds to cover
the loan.
Losses for
misappropriation of
tenant security
deposits or rents:
The lender can
pursue its rights to
the security
deposits or rents as
additional security
under the loan
documents. If the
security deposits or
rents are
unavailable, then
the lender is left
with seeking a
personal judgment
against the borrower
for the missing
security, and the
lender could pursue
tort claims such as
for conversion.
Additionally, rent
skimming is using
revenue from the
rental of
residential real
property at any time
during the first
year after acquiring
the property without
first applying the
rent (or an
equivalent amount)
to the mortgage
payments.
To enforce an
environmental
guaranty: An
environmental
indemnity will
survive a
non-judicial
foreclosure sale. A
lender may sue for
money or to enforce
an "environmental
provision" (a
representation or
covenant concerning
hazardous
substances) without
violating a state's
anti-deficiency
laws.
To enforce any
release of
liability: A release
of liability should
survive a
non-judicial
foreclosure sale
because a release
has nothing to do
with obtaining a
deficiency, or
otherwise trying to
enforce a monetary
obligation of the
Sponsor.
To enforce the
assignment of leases
and rents: In the
event of a
non-judicial
foreclosure, the
lender can still
obtain pre-sale
rents held by a
receiver under an
assignment of rents
clause, up to the
amount of the
deficiency, since
the assignment of
rents is treated as
additional security.
(Simply suing the
Sponsor prior to the
non-judicial
foreclosure sale for
enforcement of the
assignment of rents
and lease provisions
of a deed of trust
is also allowable).
Losses regarding
required insurance
of the collateral:
Insurance proceeds
are treated as
additional security
that is available to
the lender. The
lender can seek a
personal money
judgment against the
Sponsor for its
breach of the loan
documents.
Losses from the
failure to pay over
insurance proceeds:
After a non-judicial
foreclosure leaving
a deficiency the
lender can seek to
recover insurance
proceeds to which it
is entitled under
the loan documents.
If recovering the
proceeds from the
Sponsor proved
impossible, then the
lender is left with
seeking a personal
judgment against the
Sponsor for the
missing proceeds.
The lender could sue
in tort for
conversion.
While it seems
non-recourse
commercial loans
have "teeth" when it
comes to personally
liability, it may
not always be the
case. In the event
of a non-judicial
foreclosure, if the
lender bids at the
sale and obtains the
property, or if
someone else
purchases the
property, the amount
of bid must be
deducted from the
amount owing. If
there is no
deficiency, the
lender has little
recourse attempting
to enforce any of
the bad boy carve
outs. Additionally,
the lender will
always need to prove
its actual losses
directly caused by
breach of any bad
boy provision.
* Information was
gathered from an
article written
by Gordon L. Gerson,
ESQ. |
