Key Considerations for Default Notices/Reservation of Rights Letters for Defaulted Commercial Mortgage Loans

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The economic effects of COVID-19 are likely to cause many commercial mortgage loans to go into default. Under such circumstances, one of the first steps lenders and servicers will take will be to send out default notices to borrowers and guarantors. While not a complete list, set forth below are 5 considerations for all parties with respect to default notices:

1. Notice Provisions. The loan documents should clearly set forth the parties to whom a notice of default must be sent and how, precisely, such notice must be delivered. During times such as these, it remains imperative that both parties strictly adhere to the notice requirements expressly set forth in the loan documents. Additionally, the notice provisions in all loan documents should be carefully reviewed, particularly when, for example, a guarantor has signed a guaranty and an environmental indemnity agreement only. In such a scenario, following notice provisions in the loan agreement and the mortgage/deed of trust only may not be sufficient.
2. Notice Requirements, Cure Periods and Acceleration. Certain defaults under loan documents require notice and then provide for an opportunity to cure. Other defaults may not require notice and/or may not provide for a cure period. Both sides to a transaction should carefully review the provisions in the loan documents to determine if, with respect to a particular default, there is a notice requirement, an opportunity to cure, and under what circumstances a lender has the right to accelerate the loan. Additionally, both parties should carefully consider the consequences of acceleration. If a lender intends to send an acceleration notice, it generally will specify the amount of the debt then due, including default interest and late charges, as applicable.
3. Nature of Default. While it is important - for all parties - that a lender clearly specify the nature of the default and the reason for sending the default letter, it is also important, from a lender’s standpoint, to include language which makes it clear that it is not waiving rights with respect to other existing defaults, whether specified in the letter or not and whether known or unknown. Additionally, lenders will want to make certain, among other things, they are not waiving any future defaults.
4. Partial Payments. If a lender is to accept partial payments while a loan remains in default, language should be included in the default letter which makes it clear, for starters, that such acceptance does not cure the default and that the letter is not an agreement to not exercise remedies. Additional language may be included to make it clear that if the lender accepts one partial payment, it is not obligating itself to accept others.
5. Reserving Rights and Not Modifying or Forbearing. Clear language should be included in default letters reserving rights, both at law and in equity. Lenders also will often include language that confirms that the letter does not serve as a forbearance or modification of the provisions of the loan documents.

These materials have been prepared by Seyfarth Shaw LLP for informational purposes only and do not constitute legal advice.