How Long Does a Nonjudicial Foreclosure take for a Commercial Property? 

 

It may take anywhere from a few months to a few years to get through a nonjudicial foreclosure for a commercial property, depending on the individual requirements of the state where the property is located, the efficiency of that state’s court system, and whether the borrower takes action to delay completion of the foreclosure.  The process and legal requirements vary from state to state, and are also dependent on the specifics of a given situation.  

 

What Delays Can Occur in the Nonjudicial Foreclosure Process? 

 

1. Active Litigation  

 

In a nonjudicial foreclosure, because the lender proceeds outside the court process, the borrower must file a lawsuit against the lender/foreclosing party in order to challenge the foreclosure.  If the borrower does proceed with a lawsuit to challenge the foreclosure, they will typically also request a temporary restraining order (TRO) immediately halting the foreclosure proceedings, pending the outcome of the borrower’s lawsuit.  In order to obtain a TRO, the borrower must demonstrate to the court that there is a risk of “immediate” and “irreparable” injury if the TRO is denied.  The court may also require the borrower to post a bond to protect the interests of the other party in the event borrower’s lawsuit is unsuccessful or the TRO was improperly granted. 

 

        2. Bankruptcy 

 

If a borrower files for bankruptcy, all property belonging to the borrower immediately becomes part of the “bankruptcy estate” protected by the automatic stay, and the law requires that all foreclosure activities on properties owned by the borrower need to stop.  Once the automatic stay is in place, a lender must appear in bankruptcy court, file a proof of claim regarding the commercial loan being foreclosed, and obtain a court order expressly lifting the stay in order to continue with the foreclosure.  The bankruptcy court and assigned trustee will often encourage the parties to engage in settlement and loss mitigation discussions to see if the loan can be modified or otherwise paid off without a foreclosure or loss of the property.  These negotiations can be lengthy, and the court may also decline to modify or lift the stay for extended periods of time if it is not satisfied with the parties’ progress. 

 

         3.Incorrect/Incomplete Intake Docs  

 

In order to complete a foreclosure, a lender must have all the proper documents demonstrating its right to foreclose, and it must serve all required notices on the borrower and observe all applicable waiting periods.  These documents may include pre-foreclosure breach notices, a notice of default and right to cure, a notice of sale, and/or publication notice.  Failure to serve all required notices and complete all statutory and procedural requirements could result in lengthy delays in the foreclosure process. 

 

State by State Guide: Individual State Requirements 

 

Arizona  

 

When proceeding with nonjudicial foreclosure in Arizona, after a loan goes into default, the foreclosure process generally begins with the preparation and service of a pre-foreclosure breach notice advising the borrower of the default and the lender’s intent to foreclose if the breach is not cured.  Where the commercial loan documents do not require any pre-foreclosure breach notice, the lender may choose to send a notice anyway to see if the foreclosure can be avoided.   The trustee then records a notice of sale with the local county recorder, which includes the date and time of the sale, as well as its location.  Within 5 business days of the recording of the notice of sale, the trustee must serve copies on the borrower, along with a statement of breach identifying the default, the amount owed, and directing the trustee to exercise the power of sale.  Copies of these documents must also be mailed to any other interested parties within 30 days of the recording of the notice of sale. 

Under Arizona law, the sale may not be scheduled for a date less than 91 days after the date the notice of sale is recorded.  The notice of sale must also be publicly posted and posted at the property at least 20 days prior to the sale date, and published for 4 consecutive weeks prior to the sale date. 

 

California 

 

In the State of California, after a commercial loan goes into default, most lenders will serve the borrower with a demand letter giving the borrower an opportunity to cure within a certain time period.  If the borrower fails to pay off the debt or bring the loan current before the period expires, the lender may proceed with a nonjudicial foreclosure by first recording a substitution of trustee appointing a properly authorized individual to act as trustee and conduct the foreclosure sale.  Next, the newly substituted trustee will record a notice of default and serve copies on the borrower and all interested parties.   
 

The trustee cannot schedule the trustee’s sale for at least 90 days following the recording of the notice of default. 

 

Once the 90-day period expires, the trustee will schedule the sale and prepare a notice of sale for service and publication.  At least 20 days prior to the scheduled sale date, the trustee must: (1) mail the notice of sale to the borrower and any interested party, (2) post the notice publicly and on the property, (3) publish the notice for 3 consecutive weeks, and (4) record the notice of sale with the county recorder where the property is located. 

 

Missouri 

In Missouri, the process generally starts with a breach letter sent to borrowers in default, if required by the loan documents.  Borrowers must be delinquent on the loan for at least 120 days before a notice of sale can be issued, with the sale occurring somewhere between 40 and 50 days after publication of the notice.  Lenders are required to publish the foreclosure notice in a newspaper in the county where the property sits.  Depending on the size of the specific town, they need to either publish 20 times until the day of the sale or once a week for 4 weeks, with the sale taking place on the last week. 

 

Nevada  

In Nevada, there is no statutory requirement to send a pre-foreclosure notice or default notice to a borrower on a commercial property, but a lender may still be required to send such notice of required by the terms of the loan documents.  To start the process, the trustee prepares and records a notice of default/breach and election to sell, and serves copies on the borrower and any interested parties.  Within 35 days of service of the notice of default, the borrower has the right to cure and the notice must be rescinded if cured.   

 

The notice of sale must then be recorded within 3 months of recording of the notice of default.  Copies of the notice of sale must also be publicly posted and mailed to the borrower and all parties in interest.  Finally, the notice of sale must be published at weekly intervals for at least 3 weeks prior to the sale date.   

 

 

Texas  

As in other nonjudicial states, there is no statutory requirement to send pre-foreclosure default notices to commercial borrowers, so no such notice is necessary unless contractually required under the terms of the individual loan documents.  When the lender elects to accelerate, a notice of substitution of the trustee is generally recorded first, appointing a new and more qualified trustee in place of the “placeholder” trustee originally named in the deed of trust.  The trustee then posts and serves a notice of trustee’s sale at least 21 days prior to the scheduled sale date, and also sends notice of the sale to the IRS at least 25 days prior to the scheduled sale date. 

 

This is Part 2 of “Nonjudicial Foreclosures on Commercial Loans: What Lenders Need to Know.”  To jump back to Part 1, click here. 

 

Legal Disclaimer:

This article does not constitute an offer to sell, or the solicitation of an offer to buy, any security interest in any jurisdiction. This material is distributed for informational purposes only and should not be construed as investment, legal, tax, regulatory, financial, or other advice. No assurance can be given that any investment objective will be achieved, or that an investor will avoid losses or obtain a return on an investment. While the information contained in this article is believed to be reliable, its accuracy is not guaranteed. Individuals should consult with their own professional advisors with respect to the legal, tax, regulatory, financial, and accounting consequences of any potential investment.