Litigation

Herrick partner and co-chair of the Real Estate Litigation & Dispute Resolution Practice Group, Scott Tross, spoke with Law360 Real Estate Authority about what options lenders have when commercial real estate loans go unpaid.

The article explained that if a borrower attempts to abandon their debt, lenders have the option to obtain payment from the guarantor. "Lenders are becoming more aggressive because they need to be," said Scott.

The article noted that although most guarantors utilize the nonrecourse carveout that "provides limited circumstances under which lenders can seek recourse from guarantors [and] has become boilerplate across commercial real estate lending." Getting past the nonrecourse carveout is "a very tall hill to climb," Scott said. Still, there's a list of things borrowers can do that could trigger the so-called bad boy clause and give lenders an opening. "There are opportunities for lenders to make arguments, and they are," Scott said. "Whether or not they prevail remains to be seen."

The article highlighted that one method of overcoming nonrecourse carveouts is the "bankruptcy exception." The bankruptcy exception is so well-known that commercial real estate borrowers rarely seek bankruptcy protection, Scott said, because they "know the consequences." Other triggers include accepting subordinate debt, which could be in the form of unforgiven Small Business Administration loans that many borrowers took out during the COVID-19 pandemic, according to Scott.

Additionally, foreclosing is another route that could allow a lender to recover their losses. Given how complex foreclosures can be in New York City, why would a lender choose to foreclose? "The only good answer to that question is if [the lender] thought there was a possibility of collecting something from the guarantor," said Scott, who has written extensively about foreclosures. "There's no other reason to put off the inevitable."

Read the full article in Law360 Real Estate Authority here. Access may require a subscription.