Defaulted loans that commercial real estate secures can present unique legal issues for both lenders and borrowers. Borrowers may encounter financial hardship due to the loss of a long-term tenant, diminished cash flow due to vacancy or market trends or difficulty paying operating expenses due to myriad reasons. A lender may seek judicial or non-judicial foreclosure when a borrower defaults on a commercial loan. In some situations, the lender may try to appoint a receiver who can collect rent, maintain the property and otherwise take over operations of the commercial unit until the foreclosure is final.
Any type of commercial property could potentially be subject to the foreclosure process, ranging from large apartment buildings, offices, retail buildings, warehouses and mixed-use properties. Foreclosures may also be part of a bankruptcy proceeding.
Parties may agree to arbitrate commercial foreclosure cases after a dispute arises, or they may have a mandatory arbitration clause in their lending agreement. When the process begins, the parties select an arbitrator or panel of arbitrators from a pre-approved list. The parties reach agreement as to the processes leading up to arbitration, such as whether to limit the scope of discovery. When discovery is limited, this can also save money. You may also be able to save money by avoiding the costs of ongoing litigation.
An arbitrator may make a final decision regarding the foreclosure, or it may explore the availability of other options, such as loan workouts, the sale of a distressed asset, the appointment of a receiver or forbearance agreements. The final decision is either binding or non-binding, depending on the specific language of the arbitration agreement. Typically, the arbitrator’s decision cannot be appealed unless there was an error or provable bias.