Short Sale, Foreclosure and Strategic Default


Thursday, December 13, 2007

san diego short sales and Non-Recourse Clauses - recourse loans

Here is a good article on the question many people ask. However, be aware this article may have more application in commercial property negotiations.

Negotiating Non-Recourse Clauses - Fredrikson & Byron P.A.: "A recent article in The National Law Journal stated 'Real estate financing in the 1990s has been characterized by a steady erosion of the principle that loans secured by real estate should be non-recourse....' (Leinhardt, W. and Berg, M., December 25, 1995-January 1, 1996) The article discusses the interpretation of the term 'waste' as used in typical non-recourse clause 'carve-out' provisions. According to recent interpretations, the non-payment of taxes against the mortgaged property constitutes waste. The trend in the 90s, as discussed by Leinhardt and Berg, is not for lenders to refuse to grant 'non-recourse' loans; it is for the courts and the drafters of 'non-recourse' clauses to expand the 'carve-outs' for which borrowers remain responsible under a non-recourse loan -- 'carve-out' liabilities. However, the battle is fought more in the drafting room than in the courtroom. Most institutional lenders expressly include the non-payment of taxes in their list of 'carve-out' liabilities. Other typical 'carve-outs' under non-recourse loans include liability for: * Damages suffered by the lender on account of waste, fraud, or willful misrepresentation by the borrower; * Any retention of rental income or other income of the property after and event of default"