Commercial Property: Effect Of New Foreclosure Statute


15 February, 2010


Mortgage Lender and Servicer Alerts

Troubled though commercial properties have been in recent years as part of the international economic turmoil, the main danger has been perceived as to residential properties – people’s homes.  And just as the word “subprime” has entered the common lexicon to describe so many of the woes, so too has the apparent crisis energized legislators around the country – pointedly including New York.  Part of that zeal is reflected in the new foreclosure statute signed December 15, 20091 which brought significant changes to the foreclosure process and as a consequence, also presented major hurdles to the lending equation as well.2

Because all this seems to be a housing issue, the prevailing wisdom may be that the new statute – without doubt focused upon residential properties – therefore does not impact upon commercial foreclosures, or again as a consequence, upon commercial lending too.  That view, however, is incorrect.  The thrust of the statute is indeed directed at “home loans” and “residential real estate,” but in one of the definitions it sweeps in mixed use properties and thereby imposes startling mandates upon them.


What those directives are, and how they create issues and problems, will be the essence of this analysis.  But even had the statute not directly touched commercial properties it would nonetheless have significantly effected commercial foreclosures via the mechanics of foreclosures actions in the courts.

In this regard, one major component of the new statute is the requirement for mandatory court conferences in all foreclosures involving home loans.3  Because “home loan” does not encompass commercial or mixed-use properties4, presumably no conference (and all the delays attendant to that)5 will be needed in the commercial case.  Unfortunately though, some courts by local rule or judicial fiat are treating foreclosures monolithically – not drawing a distinction between residential and commercial – thereby imposing the conference imperative even on the commercial case

Part of the resultant considerable delay is that while the statute never stated that completion of the conference process was a prerequisite to proceeding to the next plateau of the foreclosure action (appointment of a referee to compute), courts universally act in that fashion and do not address or grant an order of reference until the conference is disposed of.  In some instances they will not even rule upon a motion for summary judgment without first having a conference.  Thus, whatever time is consumed by conference scheduling and procedures is sometimes engrafted on the commercial case.

There are yet more hidden delays associated with the conference aspect foisted upon the commercial foreclosure plaintiff.  Already overwhelmed with foreclosures (certainly in downstate New York) the obligation to conduct conferences in all home loan cases (even ignoring courts which already pull commercial actions into the scheme) will likely cripple the courts.  They lack the personnel to handle this crushing volume which therefore portends still further unpalatable delay in New York’s already far too lengthy foreclosure duration.


Imposition of exceptional delay would be more than sufficient deleterious consequence to graft upon commercial foreclosure cases.  But then the new foreclosure legislation specifically involves the commercial loan in a number of areas.  This occurs solely because the new RPAPL §1305 (a) defines “residential real property” in an unusually broad way which thereby ensnares the commercial lender, thus: “property … improved by any building…that is or may be used, in whole or in part, as the home or residence of one or more persons, and shall include any building… used for both residential and commercial purposes.”

It is immediately apparent that many loans emanating from lenders’ commercial departments run afoul of the new statute: apartment buildings; stores with an apartment upstairs; various combinations of each, etc..  Although some portions of the statute pertain to “home loans” (a narrower definition which does not include commercial6) a number of critical sections do indeed include “residential real property” – thereby encompassing the commercial.

The statute of course does not neatly say “commercial mortgages here, loans on houses there.” Nor is the meaning of each term readily apparent on their face, home loan versus residential real property.  Moreover, the terms are sprinkled throughout disparate sections.  In sum, when traversing the discursive statute, observe that when home loan is mentioned it is outside the commercial realm.  When residential real property is the subject, commercial can be included.

Here then are the requirements as they apply to commercial loans and but a few of the inherent problems.7


In the foreclosure world until now, the commercial lender would make a business decision as to which tenants to name and serve in the foreclosure, be they residential or commercial.  The question addressed internally always was, is the property more valuable or less valuable with the various tenancies extinguished (so that they would be named as defendants in the action) or preserved untouched ( so that they would not be named in the action)?  No more.

Now (pursuant to RPAPL § 1303 and 1305) there is a reversal of priorities – residential leases survive foreclosure.  This is manifested first in the obligation of the foreclosing party to provide certain notice at the action’s inception to any tenant of a dwelling unit.  (Requirements for precise verbiage, the size of the type and color of the paper are in the statute, RPAPL § 1303.)

If the building has less than five units, delivery of the notice is to be by certified mail, return receipt requested and by first class mail to the tenant at the property, if the tenant’s identity is known.  If the identity is not revealed, the mailing is to be by first class mail addressed to “occupant”.  Should the building consist of five or more units, the notice must be posted “on the outside of each entrance and exit…”

The provisions of the notice appear in the statute and include advisements that if the lease payments at lease inception were not substantially less than the fair market rent, the tenant may be able to remain for the lease term; if no lease, remaining for ninety days after the acquirer of the title sends a notice as required by RPAPL § 1305.

Aside from the monumental reversal of priority component, the problems with this notice requirement are considerable, primarily affording tenants and the defaulting mortgagor the opportunity to allege that notice was not provided, of if provided, that it was not timely. (Notice to be sent ten days from date of “service” is far too imprecise in a foreclosure case.) Or the borrower or tenants could assert that the notice was never affixed.  It will be easy for a disgruntled tenant – or even a stranger – to rip down the notice.  Yet further paths to delay or assault foreclosures are conspicuously unwelcome.


All pursuant to RPAPL § 1305, the purchaser at the foreclosure sale must provide written notice (by mail is the only mode of transmittal mentioned) to all tenants of their right to remain, stating the name and address of the new owner.  Tenants must be advised of their right to stay in occupancy for the remainder of their lease terms, which may be written, oral or implied (the uncertainty of oral or implied leases is apparent) or for ninety days from the date of mailing the notice, whichever is greater.  The terms and conditions of the lease are those in effect when the foreclosure judgment was entered.

For the lease to qualify for preservation, it cannot be substantially less than prevailing market rates, although what exactly that is will always be an issue of fact.  It seems not to take into account very lengthy leases, especially those without escalation provisions, so that a lease at the time of the foreclosure sale will be well below market as the years progress.  And what the actual provisions of an oral or implied lease might be is an eternal mystery.

There are other problems too.  Tenants can always dispute receipt of notice.  Even those conceding notice can decline to depart nevertheless, thereby banishing the owner to an often lengthy eviction proceeding.  Perhaps most disconcerting, it will be extremely difficult for any foreclosure sale purchaser to know what leases – what terms and what durations – will continue to burden the foreclosed property.  This will serve to chill bidding and lead to the foreclosing party ever more often constrained to be the purchaser at the foreclosure, bound to hold the property and incur the costs, only to sell it some unknown time in the future


Pursuant to RPAPL § 1307, from the moment a plaintiff “obtains” a judgment of foreclosure and sale upon residential real property, under certain recited circumstances, the plaintiff must maintain the property until recordation of the deed through foreclosure.

The maintenance obligation applies when the property “is vacant, or becomes vacant after issuance of such judgment, or is abandoned by the mortgagor but occupied by a tenant…”

The plaintiff is given the right to peaceably enter the property for inspections, repairs and maintenance, although if there is a tenant present, at least seven days’ notice must be provided; reasonable notice in the event of emergency repairs.

The obligation to maintain and repair is enforceable by the local municipality, a tenant lawfully in possession and a homeowner’s association (if applicable), upon seven days’ notice to the plaintiff, except for emergency repairs, in which event notice is unstated.  The enforcer also is granted a cause of action against the foreclosing plaintiff to recover the costs of maintenance.

A bankruptcy filing suspends the maintenance mandate until the stay is lifted and there is no maintenance responsibility while a receiver’s authority is pending.

The level of maintenance is controlled by the standards in the New York Property Maintenance Code, Chapter 3, Sections 301, 302 (with exclusions listed), 3014.1, 304.3, 304.7, 304.10, 304.12, 304.13, 304.15, 304.16, 307.1 and 308.1.  However, where the property is occupied by a tenant, the additional requirement of maintenance in a safe and habitable condition is imposed – which means supplying heat and utilities.

The impositions of these mandates are likely the most disconcerting aspect of the new statute.  A mortgage is a lien, not an ownership interest.  While a foreclosing lender can elect to seek a receiver’s appointment, or become a mortgagee in possession, there are reasons to refrain from both, something that has always been a lender’s choice.   Under the new imperative, lenders are taking on a responsibility that never could have been expected or quantified.

Determining “vacant”, or abandoned by the mortgagor (there may not be a mortgagor if he sold the property; and if abandoned means moved away, what if he never lived there?)  will be elusive to say the least.  Then there is the issue of defining the starting point of maintenance responsibility – “obtaining” a judgment is not a definable event which comports with actual practice.  Of concern too is the dilemma presented by property becoming vacant after judgment.  How often the foreclosing plaintiff will need to visit the premises to reach such a determination is emphatically an imponderable.

Duration of this obligation is also indeterminate and thereby a meaningful peril.  The reasons why scheduling foreclosure sales can be delayed, or sales can be postponed, or closings adjourned, or cancelled, are legion.  Then there are the incessant orders to show cause from obstreperous borrowers.  The obvious point is that the immeasurable cost forced upon a lender to maintain property in foreclosure (and possibly supply heat and utilities to an unnamed number of tenants) for a period of time which can never be finite or predictable, is too weighty a millstone.  If lenders choose to avoid making loans which might elicit such an ordeal it would not be surprising.


A major infirmity of the new statute is the lack of clarity on far too many points.  Some of those are mentioned here but there are quite a few more.  That the confusion in language augurs litigation is apparent.  In the residential arena, the sums at issue perforce mean less such litigation – not that it won’t be thorny and vexing, just that the volume of assaults will have to be fewer.  But in the commercial case, sophisticated borrowers dealing with much larger numbers will engage sophisticated counsel and will be more likely to possess the financial wherewithal to fund the attacks.  All this makes the intrusion of the statute into the commercial realm all the more dismaying.


Whatever the basis – or lack thereof – for accusations hurled at residential lenders which has elicited remedial legislation in the foreclosure arena, we have not heard that commercial borrowers are among the disadvantaged and downtrodden.  Whether the new legislation consciously intended to pull commercial lenders into the odious mire of delay and expense engendered by the statute is unclear.  But they are in it, less than residential lenders, but there nonetheless.

  1. For an extensive review of the statute see “New Law Will Create Delay, Additional Costs for Lenders”, N.Y.L.J., Jan. 13, 2010 at 5, col. 2.
  2. The relationship of lending to the problems presented by the new statute are also discussed at the article noted in footnote 1.
  3. CPLR § 3408 (a).
  4. The definition of home loan is found at RPAPL § 1304 (5) (a) and requires among other things, that the borrower be a natural person with the debt incurred primarily for personal, family or household purposes, that the property be improved by a one to four family dwelling (including a condominium) and pursuant to CPLR §3408 (a), that the defendant is a resident of that property.
  5. See discussion at “New Law Will Create Delay, Additional Costs for Lenders”, NYLJ, Jan. 13, 2010, at 5 col. 2.  These apply as well to purely residential cases.
  6. See footnote 4.
  7. The new statute in any event is fraught with imprecision and unintended consequences, all of them too lengthy to discuss here.  For a more comprehensive analysis, see considerable review at “New Law Will Create Delay, Additional Costs for Lenders, N.Y.L.J., Jan. 13, 2010 at 5, col. 2, and still more at the various applicable sections of the three volumes of Bergman on New York Mortgage Foreclosures, LexisNexis, Matthew Bender (rev. 2010).

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.