Comparing Residential Foreclosure to Commercial Foreclosure in New York State

When a person or company pledges real property they own as security for a loan or debt, it is known as a mortgage. A mortgage loan generally consists of a Note, a document in which the borrower promises to pay a sum of money to the lender (usually a bank, but sometimes a private individual), and a Mortgage, a document in which the borrower pledges their ownership interest in real property as security for the mortgage.

Unfortunately, there are times when the borrower is unable to meet its legal obligations under the Note and Mortgage. When this happens, the lender has two options. The first is to bring a lawsuit on the Note alone, and, if successful, obtain a money judgment against the borrower which can be enforced for collection. The second is to bring a foreclosure proceeding against the borrower, in which the Court is asked to foreclose the real property in question. The two options are mutually exclusive; that is, the lender must choose one of the two options, and not both.

This blog entry will discuss the procedure when a foreclosure action is brought by the lender. In a foreclosure action in New York State, the end result of the proceeding is that the property being secured by the Mortgage and Note is sold at public auction to the highest bidder. If the lender is the highest bidder, it takes title to the property in question and may then obtain a money judgment against the debtor for the difference between their successful bid and the amount due on the Note, plus costs and expenses. If a third party is the highest bidder, the amount of the successful bid, up to the amount due, is paid to the lender. The third party then takes title to the property.

New York State has recently passed several laws protecting property owners, in response to the high rate of defaulting borrowers. It should be noted that these additional legal protections only apply when the property in question is the primary residence of the borrower. These new legal protections, which can be found in New York Real Property Actions and Proceedings Law §1304, include additional notices to be given to the defaulting party, a ninety day period during which the parties must try to resolve the case before the lender can sue, and a mandatory settlement conference to be held at the Court within sixty days of the commencement of the foreclosure action.

The purpose behind these new laws is to enable defaulting homeowners to remain in their residences, and to encourage lenders to “work out” a solution with the defaulting borrower to enable the borrower to resume making payments on their mortgage loan.

It must be noted that these additional protections do not generally apply to commercial or investment property. Therefore, when the property being foreclosed is not the primary residence of the defaulting borrower, but is property purchased by the borrower for investment or other commercial purposes, the Courts do not mandate any additional notices or settlement conferences. The reasoning behind this is that the New York State legislature has determined that those who purchase investment or commercial rental properties are sophisticated borrowers who do not merit the individual protection that a single homeowner may need. Further, they are not at risk of losing their home.

Therefore, when an action is brought to foreclose on commercial or investment property, it is important to advise the Court in New York State that the case in question is a commercial foreclosure. This will enable the case to move more quickly through the Court system, and enable the lender to resolve the matter more quickly than a residential foreclosure.