Accelerations & Defaults

Q: What can cause a default and acceleration in a commercial mortgage?

A: Generally, the causes for default activating a lender’s right to foreclose are set forth expressly in the mortgage. Florida courts are liberal as to allowing the parties to freely determine what events may constitute default. Fundamentally, mortgage defaults are classified as monetary or non-monetary defaults. Monetary defaults include failure to make payment when due, since failure to pay goes to the very essence of the loan agreement. Non-monetary defaults are normally violations of one of the long list of covenants and conditions with which the borrower must comply. For example, borrowers are usually required to maintain insurance on the property, to pay all property taxes, to keep the property in good repair, to pay senior loans, to prevent cross-collateralized defaults and many other things. The purpose of most of these conditions is to require the borrower to protect the lender’s collateral. If the borrower does not maintain insurance, for example, and the collateralized structure burns down, then the lender risks not being paid if the loan is not paid and the lender has to foreclose.

Q: How does an acceleration on a defaulted loan obligation work?

A: If a borrower fails to perform, the lender may declare a default under its note, and mortgage or deed of trust. As a rule, the loan documents will give the borrower a certain amount of time to fix the problem, or to cure the default. Most mortgages or deeds of trust give the lender the right to accelerate the note upon default. This means that, if the borrower misses one payment, the lender can declare the entire amount of the mortgage – not just the missed payments – to be due. These acceleration clauses in promissory notes ordinarily are enforceable under Florida law. In some non-real estate contexts, if one payment is missed on a debt, the lender can accelerate the loan, demand payment in full and the borrower can do nothing, except pay in full or suffer the consequences.

Upon monetary or non-monetary default, the lender usually has the contractual right to immediately accelerate mortgage obligations unless: the lender waives the right to accelerate or is estopped to do so because of misleading conduct or unfulfilled conditions; the borrower tenders payment after default but before notice of the lender’s election to accelerate; or the borrowers failure to make a timely payment has been thwarted by a misunderstanding or excusable neglect coupled with some conduct on part of the lender which contributes to the borrower’s default. Thus, in exercising a right to acceleration, it is important for the lender to review and comply with the specific terms of the loan documents and the procedure for properly accelerating the loan, most specifically the notice requirements. As a general rule, Florida courts will only deny otherwise proper accelerations if the lender’s own actions contribute in some fashion to the default.

Q: Can a borrower defeat a lender’s right to accelerate with partial payments prior to a proper acceleration?

A: No. Making only a partial tender before notice of election to accelerate is communicated does not prevent the lenders option to accelerate the mortgage.

Q: Can the mortgagee (lender) continue the foreclosure process even if the mortgagor (borrower) catches up payments after acceleration?

A: Florida courts have held that If proper acceleration precedes full tender of arrears, the lender has the right to continue to foreclose upon the accelerated indebtedness, which at the time may only consist of late fees, interest and/or prepayment penalties. Courts, however, are reluctant to enforce the right to accelerate when acceleration would be inequitable and unjust. If the mortgage default was non-monetary in nature, it is likely that Florida courts would exorcise their equitable discretion in denying foreclosure.