Foreclosures

Q: What is a commercial foreclosure?

A. When a secured creditor, usually a lending institution, attempts to recover monies owed based on a promissory note made by a commercial entity by legally recovering right to the collateral.

Q: What is a decree of foreclosure and what are foreclosure proceedings under Florida foreclosure law?

A: The words “decree of foreclosure” shall include a judgment or order rendered or passed in the foreclosure proceedings in which the decree of foreclosure shall be rescinded, vacated, and set aside. The words “foreclosure proceedings” shall embrace every action in the circuit or county courts of [Florida] wherein it is sought to foreclose a mortgage and sell the property covered by the same. Fla. Stat. §702.09.

Q: Does a foreclosure action in a court of equity substantially affect a lender’s right to enforce loan obligations against a borrower?

A: Because foreclosure actions are litigated in courts of equity, the judges of those courts have traditionally been granted the discretion and authority to do justice between the parties, particularly in circumstances where one party is attempting to profit from his own intentional misconduct. Though in practice this often means that judges are incredibly deferent to the defaulted borrower and their financial circumstances in exercising leniency, such deference is constricted by longstanding Florida judicial precedent safeguarding the sanctity of contracts and the right of enforcement in the event of breach. Florida courts widely recognize that the obligation of a mortgagor to pay and the right of a mortgage to foreclose in accordance with the terms of the note and mortgage are absolute and are not contingent on the mortgagor’s health, good fortune, ill fortune, or other personal circumstances affecting his or her ability to pay.

Q: What Florida statutes primarily govern foreclosure procedures?

A: In Florida, foreclosure procedure is primarily based on Chapters 45 and 702.

Q: How are defendants in a foreclosure action determined?

A: The proper defendant in a foreclosure suit, first and foremost, is the legal title owner of the property estate being foreclosed. There may also be several other necessary parties, depending on the results of the foreclosure title insurance commitment. Any person or entity having an inferior interest in the property to the legal title owner’s interest or the plaintiff’s interest and any person or entity occupying the property must be named as defendants if their interests are to be eliminated. Typical examples of these necessary and proper parties are: holders of liens or judgment that were recorded after the mortgage being foreclosed; parties in possession of the real property pursuant to a lease; parties in possession of the real property as receivers; subordinate easement or license holders; and any others whose interest in the real property are inferior to the mortgage lien. Failure to include these parties may result in their interests surviving the foreclosure action (which will result, in turn, in the property being sold subject to such interests). If necessary, a separate action may also need to be commenced to evict any tenants who are not named and served in the foreclosure action. Personal guarantors and anyone holding lease or purchase options should also be considered as defendants. Entities with a superior lien interests are not proper defendants unless they must be joined for some other purpose, because these superior interests cannot be foreclosed.

Q: What are the basic steps in the Florida commercial foreclosure process?

A: Pre-Foreclosure

1. Borrower misses mortgage payments.
2. Late notices sent by bank. Written and verbal communication lines opened. Loss mitigation analysis conducted.
3. Workout measures employed by lender.
4. View premises and ensure no unexpected parties are in possession.
5. Perform environmental assessment.
6. File sent to legal counsel.
7. Demand for payment under the note in full, based on the acceleration clause is issued.
8. Pre-foreclosure collateral valuation process initiated.
9. Confirm lien superiority.
10. Confirm payment of documentary tax obligations. See Fla. Stat. §201.08.
11. Full analysis of account balance and debt instruments conducted.
12. Full analysis of noticing compliance and foreclosure conditions precedent conducted.

Formal Legal Foreclosure Process

1. Foreclosure complaint filed in court of county where property is located.
2. Service perfected (20-60 days response period after service depending on defendant).
3. Debtor typically defaults and court holds hearings for final judgment upon motion. If defenses asserted, most defenses are disposed of through dispositive motion practice.
4. Court issues order allowing secured creditor to foreclose and sets date of foreclosure sale.

Post-foreclosure judgment

1. Legal notice of actual foreclosure sale and advertisements published in local papers.
2. No redemption is made by borrower.
3. Proper certificates provided to clerk.
4. Perform bid analysis and confirm bid instructions.
5. Judicial sale- property sold at auction to highest bidder.
6. Certificate of title issued if no objection to certificate of sale.
7. Proceeds disbursed.
8. Possession of property by purchaser taken.

Q: Does Florida law provide for expedited foreclosure for commercial mortgages?

A: Yes. Under Fla. Stat. §702.10, Florida law provides that after filing a mortgage foreclosure complaint, the mortgagee may request an order to show cause for the entry of a final judgment of mortgage foreclosure, whereupon the court must immediately review the complaint. If the court finds that the complaint is verified and alleges a cause of action to foreclose on the real property, the court must promptly issue and order to the defendant to show cause why a final judgment of foreclosure should not be entered. These expedited foreclosure procedures may reduce the time and expense of a simple foreclosure proceeding. However, the filing of defense by a motion or verified answer at or before the hearing on the order to show cause constitutes cause for the court to not enter the final judgment of foreclosure.

Q: When in the foreclosure process may secured creditors force borrowers off of the property?

A. Upon completion of the foreclosure sale and transfer of title to the highest bidder. This transfer of ownership becomes complete at a closing following the foreclosure auction. After the auction any defaulted borrowers automatically become holder tenants in the property formerly owned. At this point the new owner must follow the legal procedures in Florida for eviction.

Q: Where is the appropriate court to bring a commercial mortgage foreclosure?

A: In Florida, a mortgage foreclosure action must be brought in the county where the encumbered land lies. Unlike most other lawsuits, the location of the defendants is not determinative of jurisdiction. According to Fla. Stat. §702.04, if the mortgaged tract lies in more than one county, the foreclosure action may be brought in any one of those counties. If several mortgages on land in several counties are involved, separate foreclosure actions will be necessary.

Q: What statutes govern the general rules for service of process on commercial foreclosures?

A: Fla. Stat. Chapters 48 and 49, and Fla. R. Civ. P. 1.070. If personal service of process cannot be accomplished, Fla. Stat. Chapter 49 authorizes constructive service of process (i.e. service by publication) in foreclosure actions. However, there are certain prerequisites to constructive service. Constructive service can only be made, however, after diligent search and inquiry is undertaken to locate the defendant and after that investigation is verified through an appropriate affidavit. Courts require very strict compliance with the procedures for service by publication set forth in Chapter 49, and construe the provisions of that statute against a plaintiff seeking service of process under it. In general, in order for a defendant to be served by publication, Chapter 49 requires the plaintiff (or plaintiff’s counsel) to file a sworn statement meeting the statutory requirements. Section 49.041 sets out such requirements for the sworn statement if the defendant is a natural person; Section 49.051 sets out such requirements if the defendant is a corporation; Section 49.061 sets out such requirements with respect to parties doing business under a corporate name; and Section 49.071 sets out such requirements with respect to unknown parties as defendants. Thereafter, there are several other documents that plaintiff’s counsel must file with the court and several other steps to be taken in order to properly perfect constructive service. At this point, appointment of an Attorney or Guardian Ad Litem should also be considered and accomplished if necessary.

Q: What is the effect of a final judgment of foreclosure?

A: A mortgage foreclosure judgment generally includes a money judgment for principal, pre-judgment interest, expenses reasonably incurred, and costs of the action as well as an order directing sale of the property. Among many other provisions, it is important to reserve jurisdiction of the court for entry of a deficiency judgment.

Q: When and how are foreclosure sales scheduled?

A: A final judgment order issued by the court will establish a date for the judicial sale of the real property, which date must not be fewer than 20 days nor more than 35 days after the date of the final judgment, unless the plaintiff or the plaintiff’s attorney consents to an enlarged time. See Fla. Stat. §45.031. Practices vary from circuit to circuit and judge to judge as to how this sale date is established. Some circuits the clerk establishes the sale date, in other circuits the individual judges establish the sale date, and in still other circuits the attorney is allowed to pick the sale date. The clerk of court will issue a Notice of Sale containing the location, date, and time of the sale. The notice is published once a week for two weeks, with the second notice appearing at least five days before the sale.

Q: What is Florida’s requirement for noticing the foreclosure sale?

A: Fla. Stat. §45.031 requires the notice of the sale be published once a week for two consecutive weeks in a newspaper of general circulation. The second publication must be at least five days before the sale. Generally, a clerk of court can advise as to which local newspapers are acceptable to meet this notice requirement. The sale can be set aside if the notice is defective.

Q: What happens at the actual foreclosure sale?

A; The clerk usually oversees the sale, which ordinarily occurs at the county courthouse at 11:00 a.m. on the sale date. What generally happens is the bank holding the first mortgage will lead the bidding. For example, Mortgage Company “A” is holding a $100,000 mortgage it has just foreclosed. They will bid the $80,000 to $100,000 owed to recapture as much of their investment as possible. If no one bids against the mortgage company, it is often advisable to bid as little as possible to avoid paying Florida Documentary Stamps on the Deed. Rights of redemption may have some influence on bidding procedures, so it is important to weigh those considerations.

The clerk conducting the sale is entitled to receive a service charge payable at the time the sale is conducted. The winning bidder must provide a 5% percent deposit and pay the remaining balance by the end of the day or a new sale is scheduled a minimum of 20 days later. After a successful sale, the clerk gives a Certificate of Sale to the winning bidder. Within 10 days of the sale, the clerk transfers ownership to the winning bidder if no one disputes the sale. In most instances, a borrower has no right of redemption after the Certificate of Sale is issued.

Q: What happens if I do not have the original note to produce before final judgment of foreclosure is rendered?

A: The original note and mortgage must be produced when final judgment is entered. Failure to produce the original note or to provide an explanation for its absence may preclude the entry of a final judgment. With surprising frequency, institutional lenders are unable to provide originals of the notes or mortgages foreclosed upon. If the originals are not available, lenders should ensure their counsel is made aware of this and confirm an additional count is to establish the lost instrument is added to the foreclosure complaint. A five-year limitation period applicable to equitable actions on contracts may be controlling in this situation, as counts to establish lost instruments are reviewed carefully by the courts. However, the filing of a duplicate of a mortgage is sufficient to prove the mortgage if the mortgagor admits that it is a true copy of the original instrument.

Q: If my bank is not the contracting party to the original note and mortgage and merely holds the note and mortgage through assignment, how does that affect my interests?

A: The proper plaintiff of a foreclosure suit is the owner and holder of the promissory note and mortgage as of the date of filing suit according to Chapter 727, Florida Statutes. When a mortgage is sold and all rights are transferred, the transferee is the proper party to prosecute the foreclosure. It is possible, however, for an assignor to prosecute the foreclosure if so authorized by the assignee of the mortgage loan. Because standing is determined at time of filing the action, it is important to confirm assignment interests prior to litigating.

Q: What happens if junior lienholders are mistakenly or inadvertently omitted from the foreclosure proceedings?

A: It is not uncommon to discover, after completion of a foreclosure, that an existing junior lienholder has been overlooked or otherwise not joined in the foreclosure proceedings. The purchaser of the property at the foreclosure sale may enforce the rights of the mortgagee against the junior lienholder to the extent that such rights could have been enforced in the original foreclosure. The purchaser is not required, however, to reforeclose and have a new foreclosure sale held. Instead, the purchaser may sue to compel the junior lienholder to redeem within a reasonable time. The purchaser of property at a foreclosure sale may enforce rights against tenants who were omitted from the initial foreclosure by reforeclosing on such tenants.

Q: How are proceeds from a foreclosure sale disbursed?

A: Upon filing the certificate of title, the Clerk of Court disburses the proceeds of the sale pursuant to the order set forth in the final judgment, which typically denotes the following priority: a) costs of the foreclosure sale; b) judgment held by plaintiff; c) liens held by junior lien holders (according to priority); and d) surplus proceeds to the defendant (or whomever owns the equity of redemption at the time of the sale). Entitlement to proceeds does not depend on the party actively defending the suit. Even a defaulted party may participate. Because a senior lienholder’s security interest is not terminated by foreclosure of a junior lien, it is not entitled to share in a surplus fund.

Q: Is there any special redemption period after the foreclosure during which defaulted borrowers can buy the property back?

A: The right of redemption is a prerogative by which a party pays off a superior mortgage in order to protect its interests from extinguishment. Under Fla. Stat. §45.0315, the right of redemption may be exercised either by a redeeming owner or a redeeming junior lienholder at any time before the later of the filing of a certificate of sale by the clerk of court or the time specified in the judgment. Once the certificate of sale is issued, redemption is ordinarily precluded if the party asserting the right to redemption was not made a party to the foreclosure.

With federal liens, as with other junior lienors, redemption requires the full amount of the first mortgage together with attorneys’ fees, court costs and accrued interest. When the U.S. government is in the position of a second lienholder, it must assert its right to redemption in the state foreclosure action filed by the first mortgagee, or the right is waived, even if the government has filed its own federal foreclosure action. With respect to a lien arising under Internal Revenue laws, the United States has 120 days from the date of sale within which to redeem, or the period allowable for redemption under state law, whichever is longer. In other actions in which the United States has a lien and is joined as a party, its redemption period is one year from the date of sale.

Redemption does not require permission from the court nor can the court direct that the redeeming mortgagor deposit funds in excess of those due pursuant to the foreclosure judgment. In the event the mortgagor exercises its right of redemption, the mortgage being foreclosed is extinguished and the mortgagor retains ownership of the property. Redemption interests pay be exercised by paying the full judgment amount, together with all costs and attorneys’ fees. That property remains subject, however, to all the liens that were not paid off by virtue of redemption. Parties to whom the right of redemption is available include the mortgagor, junior mortgages, a person holding contract to purchase the property, or a party who purchased the property before the sale. A lessee, even with an option to buy, may only redeem under or through the mortgagor.

Q: My title insurance commitment revealed several liens on the collateralized property. How are these liens prioritized?

A: Ordinarily, in contests of competing lien positions, the well-established rule governing priority of lien interests is the first in time is the first in right. Thus priority of lien interests is generally based on the date the mortgage/lien is recorded in the official records books of the county in which the mortgaged property is situated. Assignments of mortgage become effective for noticing purposes upon recordation. The following is a breakdown on the priority of specific liens on Florida real property:

Florida Real Property Taxes – Real property taxes, as well as other taxes imposed pursuant to the Constitution and Statutes of Florida, constitute a superior lien irrespective of the timing of the mortgage.

Federal Tax Liens – In contrast to ad valorem state real property taxes, liens for unpaid federal taxes do not supersede prior recorded mortgages. The priority of a federal tax lien is based upon the date on which the notice of lien is filed in the records of the county in which the real property is located. This does create foreclosure issues though, as proper joinder of the United States of America for purposes of extinguishing federal liens encompasses different procedures that foreclosure lenders should recognize, such as the sixty-day period in which the government is allowed to answer the complaint, special rules for service of process, and the redemption rights of the government that apply well past the date of the foreclosure sale.

Florida Sales Taxes – In a fashion similar to delinquent federal taxes, the rule for liens arising from unpaid sales taxes is based upon recordation and priority in time.

Purchase money mortgages – Apart from exceptional interests such as ad valorem tax liens, and a prior recorded declaration of condominium, a purchase money mortgage takes priority not only over subsequent liens but even over prior liens attaching to the property through the mortgagor.

Judgment liens – Judgment liens attach to all real estate owned by the judgment debtor in the county in which the judgment is recorded. The lienor’s priority is fixed as of the date of its recordation and is subject to, amount other things, homestead exemptions.

Mechanic’s or Construction liens – The priority of mechanic’s or construction liens ordinarily turns upon the date on which the notice of commencement is recorded for the property on which the lien claimant furnished labor and materials. If the notice of commencement is recorded before the mortgage, any properly perfected mechanic’s liens will have superior priority even though the claims of lien are recorded subsequently.

Homeowners and Condominium Association Liens for Assessments – The liens of homeowners’ and condominium associations imposed against individual owners for unpaid assessments are subject to a legal framework that partially modifies the traditional first in time, first in right scenario. The basic rule for a homeowners’ association is that the priority of the assessment liens will be based on the filing of the declaration of covenants and restrictions if the recorded declaration clearly provides for such primacy. For condominium associations, the Florida Condominium Act governs, and the association’s lien is effective as of the date the claim of lien is filed with respect to a first mortgage, but will take priority as of the filing of the declaration of condominium with respect to secondary mortgages and other encumbrances. As a result, when a declaration of condominium is recorded prior to the mortgage, the maintenance assessments levied pursuant to that declaration will take priority over liens other than the first mortgage.