Rogers Towers, PA welcomes readers to its new Florida Banking Law Blog! A product of the firm’s Banking and Financial Services Practice Group, the blog will serve as a convenient way for us to share our expertise in banking-related legal issues. We represent banks and other providers of financial services in a broad range of matters throughout the state of Florida. As a result of our significant experience, we will have much to share in the upcoming blog posts and we hope that you will find these posts to be informative and beneficial to you in your respective positions in the industry. We appreciate your interest in the field and in Rogers Towers, PA and we look forward to your comments in response to our blog. Again, welcome to the Florida Banking Law Blog!
Legal standing to foreclose a note and mortgage continues to be an issue that frustrates plaintiffs and delights defense counsel. Florida courts have consistently held that standing must exist when the lawsuit is filed and the lack of standing cannot be “cured” absent a dismissal and refiling of the case. At a minimum this adds to the time and expense of a foreclosure. In situations where a statute of limitations prevents refiling, it could spell disaster.
In July, the 4th DCA overturned a bank’s summary judgment on the grounds that the bank failed to rebut the defense of lack of standing. Lafrance v. US Bank National Association, as truste. Apparently this case involved a situation where the plaintiff was the servicer of the loan and filed suit attaching a promissory note showing no endorsement to it. Three and a half years later, the plaintiff filed the original note which, by then, contained an endorsement in blank that was undated. The fact that the note filed with the court contained a blank endorsement was not the issue. Courts have often found that standing can exist in cases of blank endorsements. The problem here was that the endorsement was undated and the plaintiff presented no evidence that it had standing at the time the lawsuit was filed. Since it had attached a copy of the note to its original complaint that had no endorsement at all, it seems likely that the bank did not in fact have standing. Perhaps that was the reason the endorsement, added after the fact, was blank!
Commercial mortgage lenders of non-owner occupied property need to be adept at reviewing leases to protect themselves from risk. Although the rent roll is a useful tool, some lenders learned during the economic downturn that it was a mistake to rely solely on the rent roll for a picture of the future income stream of a commercial property. Lease agreements of retail space, in particular, carry some unique terms that could impact the lender in ways a typical office or industrial lease may not. A thorough review of the lease agreements not only helps to protect the lender from risks in the borrower’s ability to meet its debt service, but also can help identify provisions that might negatively impact the lender in the event of a default. A lender should be wary of the following:
Self-Help and Off-Set Rights. When a landlord fails to make certain repairs to a property, self-help and off-set rights allow the tenant to make the repairs and off-set its costs against the rent. Self-help and off-set rights interfere with the predictability of the property’s income stream. This affects the borrower’s ability to pay under the loan and the value of the lender’s security. Property maintenance and upkeep can also become a problem when properties go into foreclosure or become the subject of a distressed sale. As such, it is a prime time for tenants to exercise self-help and off-set rights. A tenant’s exercise of self-help rights while property is in foreclosure or receivership can become a burden on a receiver in foreclosure proceedings. Lenders should be wary of any self-help or off-set rights and may want to consider requiring the borrower to enter into a lease amendment with the tenant, removing those rights from the lease.
Co-Tenancies. Some tenants, such as those in retail shopping centers, would prefer to condition their lease upon the operation of another tenant in the center or upon certain occupancy thresholds. But when a key tenant leaves or the occupancy threshold isn’t met, like dominoes, tenants with co-tenancy agreements or lease provisions can leave in succession without breaching their lease agreements. Unfortunately, this occurred during the economic downturn, leaving many landlords with empty shopping centers, no recourse against vacating tenants, and no new tenants to fill the vacancies. With no income stream, landlords defaulted on their loans and lenders inherited empty centers. A co-tenancy agreement may entice a desirable tenant to move into a center, but it can also be a precursor to a rapid decline of the property. All co-tenancies should be considered in underwriting risk analyses.
Kick-out Clauses. Under a kick-out clause, if a retail tenant fails to meet a certain minimum sales threshold over a period of time, the tenant has the option to terminate the lease. The early termination could interfere with the income stream of the property and make it more challenging for the landlord to meet its debt service.
Seasonal or Temporary Leases. In the economic downturn, owners of shopping centers and office buildings were willing to take on seasonal and temporary tenants to fill space that had previously been filled by more reliable tenants. Seasonal and temporary tenancies can be deceiving to lenders looking primarily at vacancy rates. They are also less likely to be renewed and could be an indication that the borrower is having difficult filling the space. Lenders may not miss a “Halloween Store” but less obvious seasonal or temporary tenants could be missed if the leases are not carefully reviewed. A lender should protect itself by reviewing the entire lease term of each lease, rather than just the termination dates of the leases, in connection with the overall vacancy rate of the building.
Best practice calls for a full review of all existing leases so that lending institutions can factor these and other lease provisions into their underwriting decisions.
When borrowers default under the terms of their loans, lenders often, in accordance with the loan documents, can assess late fees against the borrower. When lenders assess late fees around the time of or after a loan matures or is accelerated, however, the imposition of late fees has the potential to become usurious under Florida law. Because the penalties for violation of the Florida usury statutes are severe, lenders should tread carefully when dealing with transactions that have the potential to become usurious, and should take proactive steps to become informed as to which lending practices will or will not run afoul of Florida’s usury laws.
For example, under the terms of most loans, lenders are entitled to assess late charges on payments that are not made when due. Florida law expressly allows a lender to charge a late fee “on each installment which is in default for a period of not less than 10 days in an amount not in excess of 5 percent of such installment” and provides that such fee “shall not be deemed interest or a finance charge made incident to or as a condition to the grant of the loan or other extension of credit and shall not be included in determining the limit on charges, as provided in this section.” Lenders should note, however, that only one late fee may be assessed and collected in connection with any installment, regardless of the period during which it remains in default. Additionally, if a lender chooses to accelerate a loan, late fees may not continue to accrue after the date of acceleration.
If a lender charges late fees that do not comply with the statutory provision (for example, a late fee exceeding 5 percent of the installment amount, or assessed multiple times in connection with a single delinquent payment), or if a lender assesses late fees after the loan maturity or acceleration, then those amounts would likely be included in the usury calculation, and could subject the lender to penalties. Accordingly, lenders must exercise caution when charging late fees, and should consult counsel if unsure of whether charging a late fee in a particular instance may violate Florida’s usury statutes.