Commercial Foreclosure Process
§ 22.1Introduction to Commercial Foreclosure
With one exception, the statutory mandates of Tex. Prop. Code § 51.002 (Sale of Real Property Under Contract Liens) apply to all lenders, commercial or residential. Subsection (d) provides an additional twenty-day notice provision for a debtor when the deed of trust encumbers the “debtor’s residence.” Tex. Prop. Code § 51.002(d). There are additional protections for debtors facing foreclosure of their residences, including state and federal statutes providing cure rights, consumer protections, and limitations on enforcement. See chapter 21 of this manual for a discussion of the residential foreclosure process.
Lenders enforcing the power of sale under their deeds of trust on commercial property have their own set of challenges, including the sophistication of the debtors, the complexity of most transactions, and the amount of money involved. Not only are the loan documents voluminous, the borrowers’ counsel will also scrutinize every action taken by the lender when enforcing the loan documents and foreclosing on commercial property.
§ 22.2Preforeclosure Considerations
§ 22.2:1Identification of All Loan Documents
After reviewing the lender’s loan file and prior correspondence and actions taken by the lender, the loan documents must be reviewed to determine what steps should be taken in the foreclosure process to ensure compliance with the loan documents and Tex. Prop. Code § 51.002. Special attention must be given to any notice and opportunity to cure provisions and the impact of any waiver provisions.
Chapter 2 in this manual addresses the information the attorney should collect in connection with the client’s request that an attorney enforce collection of a debt in default. See form 2-1, Loan Referral Questionnaire, and form 2-4, Attorney’s Foreclosure Checklist.
Chapter 4 in this manual discusses the importance of examining the chain of title of the mortgaged property to identify all recorded instruments that affect title and the priority of the deed of trust lien being foreclosed.
In addition to reviewing the lender’s loan policy, most attorneys engage a title or abstract company to perform a basic title search to update the title from the date of the loan policy and provide copies of all recorded documents. The primary purpose of a title search is to ensure there are no filings or encumbrances recorded in the real property records after the date of the loan policy that could survive a foreclosure sale. See, e.g., Mortgage & Trust, Inc. v. Bonner & Co., 572 S.W.2d 344 (Tex. App.—Corpus Christi–Edinburg 1978, writ ref’d n.r.e.). The best practice is to review copies of all the recorded documents in the chain of title and not depend on an abstractor’s run sheet.
Title searches are not insurance policies and provide little recourse in the case of error (usually limited to zero or the cost of the title search).
Chapter 4 in this manual provides a list of title concerns which must be addressed if they are identified in the chain of title.
The foreclosing lender can purchase a “Limited Pre-Foreclosure Policy” (Form T-98) and a “Limited Pre-Foreclosure Policy Downdate Endorsement” (Form T-99). In practice, most attorneys seldom obtain this coverage because the premium cost of the policy is significant compared to the insurance coverage provided.
Procedural Rule P-43 sets forth the terms, conditions, and requirements for the issuance of a Limited Pre-Foreclosure Policy and Limited Pre-Foreclosure Policy Downdate Endorsement. Procedural Rule P-43 is found in section IV, “Procedural Rules,” of the Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas issued by the Texas Department of Insurance. The Basic Manual, forms, and endorsements can be found at the Texas Department of Insurance website at www.tdi.texas.gov/title/titleman.html.
§ 22.2:3Waiver of Notice and Other Waiver Clauses
One of the most important questions in a commercial foreclosure is: if the note and other loan documents have clear, unequivocal waivers of demand, presentment, payment, acceleration, intent to accelerate—which they invariably do—is any notice of default and opportunity to cure required before accelerating the debt and posting the property for sale? The Texas Supreme Court addressed this issue in Shumway v. Horizon Credit Corp., 801 S.W.2d 890 (Tex. 1991), stating:
To meet this standard, a waiver provision must state specifically and separately the rights surrendered. Waiver of “demand” or “presentment,” and of “notice” or “notice of acceleration,” in just so many words, is effective to waive presentment and notice of acceleration. Likewise, a waiver of “notice of intent to accelerate” is effective to waive that right. However, waiver of “notice” or “notice of acceleration” does not waive notice of intent to accelerate, a separate right. Waiver of “notice” or even “all notice” or “any notice whatsoever,” without more specificity, does not unequivocally convey that the borrower intended to waive both notice of acceleration and notice of intent to accelerate, two separate rights. We disapprove cases that have reached contrary results.
Shumway, 801 S.W.2d at 893–94 (internal citations omitted).
Section 8.5 in this manual discusses the enforceability of waivers in the loan documents.
A residential lender typically holds the borrower in default for failure to (1) timely pay the loan, (2) pay property taxes, or (3) keep the collateral insured as required by the deed of trust.
In addition to the timely payment of the loan, a commercial lender has a wide range of default possibilities which address the financial viability of the borrower and any guarantors and the operation and maintenance of the mortgaged property. Events of default in commercial loan documents (which may or may not be subject to contractual notice and cure periods) include not only the nonpayment of the loan, property taxes, and insurance premiums, but also the borrower’s failure to (1) maintain a specified debt service coverage ratio, (2) comply with all terms of the loan documents, (3) timely commence construction and completion of the improvements to be built with loan funds, or (4) pay a money judgment within a stated period. These are just a few of the litany of defaults in a commercial loan agreement or deed of trust.
§ 22.2:5Letter of Strict Compliance
In reviewing the files of the mortgagee, counsel may discover that the lender or its agents have accepted late payments, failed to impose late fees or other charges, or permitted other defaults as defined by the loan documents. In such instances, before sending out formal notices of default or other foreclosure notices, it is important to send a letter of strict compliance to the borrower. This letter states that in the future, the terms of the loan documents will be strictly observed and the lender expects full and complete compliance with the same. Sending a letter of strict compliance will prevent or reduce claims of waiver and estoppel by the borrower. See form 22-1 in this chapter for an example letter of strict compliance.
Having completed the steps outlined above, it is time to make demand on the borrower to cure the default.
Chapter 8 in this manual, “Demand for Payment, Notice of Intent to Accelerate, and Notice of Acceleration,” addresses the processes for sending notices of default, applicable case law, practice tips, and forms for notices of default and demand letters.
Most commercial lenders do not rely on the waivers given by the borrower in the loan documents, which suggest that (1) notice of default, (2) intent to accelerate, or (3) acceleration are not required. In practice, most commercial lenders follow a two-step process similar to the process required in a residential foreclosure:
1.Give the borrower notice of the default and demand payment or other action to cure the same, allowing a reasonable cure period if no such cure period is otherwise specified in the loan documents (ten to twenty days are suggested for monetary default; thirty days are suggested for nonmonetary default). In this same notice, even if waived, the lender will give notice of intent to accelerate if such default is not cured within the cure period.
2.If the cure period passes without a cure acceptable to the lender, give the borrower notice that the default remains uncured and that the note has been accelerated, accompanied by a notice of trustee’s or substitute trustee’s nonjudicial foreclosure sale. See Tex. Prop. Code § 51.002.
Form 8-3 in this manual, Demand for Payment and Notice of Intent to Accelerate, pertains to step 1 above.
Form 12-2, Notice of Acceleration and Foreclosure Notice Letter, pertains to step 2 above.
§ 22.4Abandonment and Waiver of Acceleration
There are cases holding that a noteholder can waive acceleration if it accepts payments postacceleration. It is good practice to resend a notice to cure and intent to accelerate if payments were accepted postacceleration. See Holy Cross Church of God in Christ v. Wolf, 44 S.W.3d 562, 566–67 (Tex. 2001) (“Even when a noteholder has accelerated a note upon default, the holder can abandon acceleration if the holder continues to accept payments without exacting any remedies available to it upon declared maturity.”).
If parties to a note agree to deaccelerate the debt, then it is recommended that the parties enter an agreement in writing because the prior acceleration would have started the statute of limitations. See Holy Cross Church, 44 S.W.3d at 566; see also Khan v. GBAK Properties, Inc., 371 S.W.3d 347, 353 (Tex. App.—Houston [1st Dist.] 2012, no pet.) (“Abandonment of acceleration has the effect of restoring . . . the note’s original maturity date.”).
Tex. Civ. Prac. & Rem. Code § 16.038 allows a mortgagee to rescind the notice of acceleration of the maturity of an installment note by sending a notice by first-class and certified mail to the debtor at the debtor’s last known address.
See section 8.6 in this manual for a discussion of these issues, form 8-1 for a sample form agreement to withdraw acceleration of debt, and form 3-3 for a reinstatement agreement.
§ 22.5Effects of Bankruptcy Filing
The filing for bankruptcy protection allows borrowers to provide for a cure of monetary defaults (e.g., payment arrearages) through a bankruptcy plan. See Grubbs v. Houston First American Savings Ass’n, 730 F.2d 236 (5th Cir. 1984) (citing with approval In re Taddeo, 685 F.2d 24 (2d Cir. 1982)). When a borrower’s bankruptcy case is dismissed, it is prudent to resend the demand to cure and notice of intent to accelerate. However, there are cases holding that if the borrower’s bankruptcy case is dismissed before the delinquent amount being cured through the bankruptcy plan, then the lender does not have to resend a notice to cure and notice of intent to accelerate. See Higginbotham v. Indymac Bank, F.S.B., No. 4:17-CV-00229, 2017 WL 2701939, at *4 (E.D. Tex. June 1, 2017).
Chapter 12 in this manual, “Notice of Foreclosure Sale,” addresses the contents and procedures to be followed when delivering and posting notice of a nonjudicial foreclosure sale.
Commercial loan guaranties invariably waive any duty to notify the guarantor of any event of default and notices of the collection or foreclosure process. Texas Property Code chapter 51 imposes no requirement to give notice of foreclosure to guarantors.
Section 8.9 in this manual discusses the enforceability of waiver of notices to guarantors. There is no statutory or common law requirement to give guarantors notice of default, intent to accelerate, acceleration, or foreclosure. It is best practice that the demands and notices sent by the lender to the debtor also be sent to each guarantor. See section 12.3:3 in this manual.
The lack of notice to guarantors has been held to affect personal property foreclosures. A guarantor is a debtor within the meaning of sections 9.102(a)(28), (61) and 9.611 of the Texas Business and Commerce Code. See Carroll v. General Electric Credit Corp., 734 S.W.2d 153 (Tex. App.—Houston [1st Dist.] 1987, no writ), abrogated by Greathouse v. Charter National Bank-Southwest, 851 S.W.2d 173 (Tex. 1992) (failure to notify guarantor of nonjudicial foreclosure sale of personal property bars assertion of deficiency claim on behalf of creditor); Peck v. Mack Trucks, Inc., 704 S.W.2d 583 (Tex. App.—Austin 1986, no writ), abrogated by Greathouse, 851 S.W.2d 173; Hernandez v. Bexar County National Bank, 710 S.W.2d 684, 687 (Tex. App.—Corpus Christi–Edinburg), writ ref’d per curiam, 716 S.W.2d 938 (Tex. 1986).
The Fifth Circuit, after noting a split among Texas courts of appeals, upheld a guarantor’s contractual waiver of notice of disposition of collateral by a secured party. In Steinberg v. Cinema N’ Drafthouse Systems, Inc., 28 F.3d 23, 25 (5th Cir. 1994), the Fifth Circuit held that the restriction on waivers of former Business and Commerce Code section 9.501 is inapplicable to guarantors. The court noted that the Texas Supreme Court had reserved judgment on this issue.
§ 22.8Bid Evaluation and Determination
Chapter 13 in this manual addresses the process for formulating a strategy for bidding at a nonjudicial foreclosure sale.
Chapter 14 in this manual addresses the steps taken by the trustee or substitute trustee when enforcing the power of sale in the deed of trust.
§ 22.10Distribution of Net Sales Proceeds
Chapter 15 in this manual addresses the distribution of the foreclosure sales proceeds to the proper parties.
Chapter 17 in this manual addresses the calculation of the deficiency, the parties liable for payment of the deficiency, the statutes governing the recovery of the deficiency, the bringing of the deficiency suit, and the recovery of the costs and expenses of the deficiency suit.
Holmes, Niles W. “Preforeclosure Documentation.” In Advanced Real Estate Drafting Course, 2003. Austin: State Bar of Texas, 2003.
Tapley, Katherine A. “Distressed Loans and Drafting Issues Related to Workouts and Foreclosures.” In Advanced Real Estate Drafting Course, 2024. Austin: State Bar of Texas, 2024.
———. “Distressed Loans, Workouts, and Communicating with Your Lender When Your World Is Upside Down.” In Advanced Real Estate Law Course, 2024. Austin: State Bar of Texas, 2024.
———. “Guaranties.” In Advanced Real Estate Drafting Course, 2023. Austin: State Bar of Texas, 2023.
———. “Practice Tips Related to Loan Defaults and Workouts.” In Advanced Real Estate Strategies Course, 2022. Austin: State Bar of Texas, 2022.
Tomek, David W. “Documenting and Conducting Nonjudicial Real Estate Foreclosure Sales; and Deficiency Actions.” In Advanced Real Estate Law Course, 2023. Austin: State Bar of Texas, 2023.