Key Considerations for Commercial Mortgage Loan Modifications

Whether you are a lender, loan servicer, borrower or guarantor, there are many aspects to consider - under normal circumstances - when modifying a commercial mortgage loan. As COVID-19 continues to impact the commercial real estate market, an increasing number of mortgage loans likely will require modification, but parties may be forced to approach such loan modifications in a novel way. While not a complete list, set forth below are 5 key loan modification considerations:

  1. Pre-negotiation agreements. A properly drafted pre-negotiation agreement allows the parties to a commercial loan transaction to freely communicate (including via e-mail) about the loan and its potential modification without having its communications used against it in a later action. If a loan is in default or is about to go into default, the first step for all parties involved should be to enter into a pre-negotiation agreement prior to having any discussions about the loan and its modification. Click here for more insight on pre-negotiation agreements.
  2. Additional Diligence. If a commercial mortgage loan has been outstanding for some time, and a modification is being sought, for example, to extend the term, additional diligence may be desirable, but may not be practical in today’s world. For example, if a lender is approached with a request to extend a loan and/or change its terms, they often would require an updated appraisal and/or updated third party reports, such as an updated environmental site assessment or property condition report. In today’s world, it may not be practical or even possible to have such reports prepared.

Similarly, lenders frequently will require title and other searches (such as UCC, judgment, bankruptcy and tax lien searches) as well as, with respect to the existing obligors, good standing and other entity-related certificates in connection with a loan modification. If such searches and certificates are deemed absolutely necessary, the parties should consider the timing to obtain the search results and/or such certificates, particularly if secretary of state and/or clerks’ offices are closed or have limited hours. Although certain information often can be obtained on-line, the on-line data may not be current or verifiable.

These materials have been prepared by Seyfarth Shaw LLP for informational purposes only and do not constitute legal advice.

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