Defaults And Workouts Under Commercial Mortgage Loans: The Borrower's Perspective

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Defaults And Workouts Under Commercial Mortgage Loans: The Borrower's Perspective

This article is designed to identify those issues that a

borrower in Central and Eastern Europe should be thinking about if

its mortgage loan appears to be heading towards a default

situation, and, in the event a default occurs, what the leading

considerations of the borrower should be in formulating its

strategy to achieve the best possible outcome. This article is not

a review of laws in any jurisdiction, and we do not delve into the

legal minutiae of how a lender may enforce security interests in a

particular jurisdiction. Instead, we seek to set out a general

approach for borrowers on how to deal with problem mortgage loans

in the CEE.

A. Background

Commercial mortgage financing is a relatively new practice area

in the CEE, having only developed in the last fifteen years. The

lending market has historically performed well, so in contrast to

other economies which have previously lived through periods of

defaults and workouts there is comparatively little experience both

in the legal system and among market players in terms of dealing

with defaulted commercial mortgage transactions. Based on knowledge

of the legal system in place and the market, we can suggest a way

forward for borrowers. Before proceeding on this path, we will take

a brief look at the basics of the legal system, as this is the

framework in which workouts will play out.

1. The Legal System

a. Collateral Enforcement

The primary remedy available to lenders under legal systems

throughout the CEE is foreclosure on loan collateral that is then

sold at auction. Such sale procedures may be judicial (requiring

the involvement of the courts) or non-judicial (whereby the lender

can avoid having to go to court to enforce). In certain

jurisdictions the availability of a non-judicial right of sale

depends on whether this was agreed as an available remedy when the

loan was originally documented.

b. Taxation

Whenever property is transferred, there is usually a transfer

t...

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