Commercial Default: A Possible Solution
By: Myles, February 23rd, 2008
The new buzzword in legal and banking circles these days is WORKOUT. So what exactly does that mean and how does it translate on a daily basis?
Well, given the trend toward more commercial defaults, here is a possible workout solution to consider. We at MarylandCommercialTitle are always trying to look at novel solutions to solving our clients’ needs. Here’s an option that’s not always at the top of everyone’s list. It’s intellectually high-brow, while being extraordinarily practical.
An article in
According to Murray, a Deed-In-Escrow given to the lender in connection with a bargained-for workout of a defaulted mortgage loan is both effective and practical.
And here’s the relevance: A Deed-In-Escrow can work to the benefit of both parties and should be encouraged in commercial mortgage transactions when the situation warrants.
The Deed-In-Escrow option, according to the article, provides some very interesting benefits to both parties: The borrower benefits by:
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Obtaining breathing room to weather (hopefully) an economic downturn,
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Avoid or postpone adverse tax consequences (and perhaps personal liability for the debt),
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Avoid the embarrassment and publicity of a foreclosure proceeding, and
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Improve the property so that it is more attractive to potential tenants;
The mortgage lender benefits by:
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Avoiding the time and expense of a (potentially contested) foreclosure proceeding or bankruptcy filing and
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Avoids having to record a loss on its books.
From a technical perspective, recent case law favors the ability of a mortgagee to obtain a deed in escrow in connection with a workout of a delinquent commercial loan, at least in those instances when there is an agreement providing (among other things) that the mortgagee agrees to forbear from exercising its legal rights and remedies as a result of the mortgagor’s default subsequent to the date of the original mortgage. Please read the entire article for all the details, and how-to’s.
The law in this area is still evolving and both the mortgagor’s and the mortgagee’s counsel should be familiar with, and draft the documentation in accordance with, applicable statutory and case law.
As noted in this Article, there are additional risks to the enforceability of a deed-in-escrow transaction if the mortgagor files, or there is filed against the mortgagor, a bankruptcy proceeding subsequent to delivery of the deed into escrow but before its release. These problems generally can be avoided if the deed-in-escrow agreement is part of a carefully drafted consensual bankruptcy plan.
Tags: Deed In Escrow
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