Ch 14 Possession and Use of Mortgaged Property

Question 1

If you represent a bank what should you want to do (before agreeing the lend someone money to buy property)?

Answer 1

You should want to do the same due diligence as the buyer, and you should want to review the buyer’s financial statements and organization documents.

Question 2

What should a buyer do before looking to purchase?

Answer 2

Consult with the lender and get the bank’s approval before making decisions.

Question 3

What are the 16 loan documents?

Answer 3

(1) Loan Agreement
(2) Promissory Note
(3) Mortgage
(4) Assignment of Rents, Leases, and Contracts
(5) Indemnification Agreement
(6) Notice of Floodplain
(7) Guaranty Agreement
(8) Security Agreement
(9) Architect Agreement
(10) Contractor Agreement
(11) Intercreditor/Subordination Agreement
(12) Conditions Precedent
(13) Warranties and Representations
(14) Covenants
(15) Default provisions
(16) Remedies

Question 4

Loan Documents: What is the Loan Agreement?

Answer 4

Overall document that everyone signs (including guarantors) which covers everything—literally the whole deal

Question 5

Loan Documents: What is generally included in the loan agreement?

Answer 5

terms, parties, guarantors, and all required documents

Question 6

Loan Documents: what is the promissory note?

Answer 6

The instrument that evidences the debt and sets forth the terms by which it will be paid

Question 7

Loan Documents: What is the mortgage?

Answer 7

Document that evidences a lien on the property as security for the debt

Question 8

Loan Documents: Where is a mortgage filed?

Answer 8

Filed in the real estate records.

Question 9

Loan Documents: what are the Assignment of Rents, leases, and Contracts?

Answer 9

Any right of the borrower has in any of its leases and rents under the leases is assigned to the lender.

Question 10

Loan Documents: who will the Assignment of rents, leases, and contracts apply to?

Answer 10

Any current or future tenants of the property during the term of the loan.

Question 11

Loan Documents: Under the Assignment of Rents, leases, and contracts how should the borrower act while not in default?

Answer 11

Operate as normal. As soon as default occurs the lender will inform tenants to make payments directly to the lender.

Question 12

Loan Documents: What are the 3 most common indemnification agreements?

Answer 12

environmental issues, governmental requirements, ADA compliance

Question 13

Loan Documents: What is the Notice of Floodplain and what is the Federal Requirement?

Answer 13

This notice says whether the property is in a flood plain and needs insurance.

Federal requirement for “one-hundred-year flood plains” to have flood insurance

Question 14

Loan Documents: What is a Guaranty Agreement?

Answer 14

Guarantors agree that they will pay in the event of default

Question 15

Loan Documents: What is a security agreement?

Answer 15

An agreement that evidences a security interest in everything (or as much as possible) other than the real property

Question 16

Loan Documents: What is a security agreement typically taking as collateral?

Answer 16

equipment, inventory, accounts receivable, etc

Question 17

Loan Documents: What is the Architect Agreement?

Answer 17

Assigning to lender the rights to the plans and specifications, and assigning agreement to lender in the event of the borrower’s default

Question 18

Loan Documents: What is the Contractor Agreement?

Answer 18

Assigns to the lender so that the lender can step into the borrower’s shoes.
Making the contractor agree that if the borrower defaults, the contractor will perform the rest of the contract.

Question 19

Loan Documents: what type of agreement is necessary when there are multiple lenders?

Answer 19

Intercreditor/subordination agreement

Question 20

Loan Documents: what is a Intercreditor/subordination agreement?

Answer 20

Agreement between the borrower and the lenders that determines priority (does not matter what is recorded first, etc.)

Question 21

Loan Documents: What is usually included in a conditions precedent ?

Answer 21

• Execution and delivery of all loan documents
• Buyer has and will maintain property, general liability, construction, etc. insurance
• Review organization documents to confirm the borrower is in good standing
• Appraisal
• Title insurance

Question 22

Loan Documents: Why have a conditions precedent?

Answer 22

Ensures things are done before the deal is done.

Question 23

Loan Documents: Examples of warranties and representations?

Answer 23

• Borrower is telling the truth
• in existence
• there are no lawsuits pending against it
• survival clause

Question 24

Loan Documents: Examples of some covenants?

Answer 24

• Borrower will repair things, pay taxes and such, will not commit waste, will maintain insurance (will require reports)
• Financial statements (like right to review them every so often)
• Notification in the event a lawsuit is filed
• Notification if additional liens are placed on the property (or require written consent before new liens)
• Will not amend organizational documents

Question 25

Loan Documents: How long will covenants apply?

Answer 25

Until repayment

Question 26

What is the equity of redemption?

Answer 26

Essentially the debtor’s right to pay late (bank may take the property back, but the buyer can get it back again if it pays in full).

Question 27

What is the equity of redemption term in Arkansas

Answer 27

In Arkansas, it is one year, but the mortgagor can waive its right of redemption in the original agreement (practically all of them do so—when representing a bank, make sure to include this waiver).

Question 28

What is the doctrine of waste?

Answer 28

Waste is neglect of property or destruction of improvements.

Question 29

Example of "waste"

Answer 29

It is waste to demolish an existing improvement on real property, even if the intention is to replace it with a newer, better building (Fait v. New Faze Dev)

Question 30

What should be included in a loan document regarding waste?

Answer 30

Make sure there is a provision in the loan documents saying that the buyer cannot commit waste.

Question 31

Is there a good faith/bad faith requirement regarding waste in AR?

Answer 31

Nope, just waste.

Question 32

What does it mean to have a mortgage in possession?

Answer 32

It is a term applied to a lender that takes physical control of a debtor's property after default, but prior to foreclosure.

Question 33

Why would a lender take a mortgage in possession?

Answer 33

To protect its asset.

Question 34

During a mortgage in possession what is the lender considered?

Answer 34

The lender is not considered the owner during this time, but a mortgagee in possession.

Question 35

What duty does the lender have during a mortgage in possession?

Answer 35

the lender has a special duty to the mortgagor to manage and maintain the property as a prudent owner would and must make a full accounting of rents and profits derived from the property

Question 36

To simplify what duties does a lender have as the mortgagee in possession?

Answer 36

Pay taxes, assessments, maintain insurance, etc.

Question 37

How should one contract a clause to protect the bank as the lender during a mortgage in possession?

Answer 37

insert a clause that says that the lender can, but does not have to take possession, and in any event it will not be a mortgagee in possession or liable to the borrower for loss or damage except willful misconduct or gross negligence

Question 38

What is a Receiver?

Answer 38

Court appointed, and they do things like take care of the property, periodic accountings, receive rents, maintain insurance, pay taxes etc.

Question 39

Who do Receivers answer to?

Answer 39

Answer to the court, as they are an agent of the court.

Question 40

How do a Receivers obligation compare to that of a mortgagee in possession?

Answer 40

Their obligations are less than that of a mortgagee in possession; the receiver must simply maintain the status quo (bare minimum basically)

Question 41

What is enough to get a Receiver assigned?

Answer 41

Showing that the borrower is no longer paying on the note is enough to get a Receiver typically; do not have to show prejudice or something like that, especially if you have a clause to that effect.

Question 42

Can you request a Receiver ex parte in AR?

Answer 42

Yeah, but courts don't like it.