In this article we will look at three lessons that can be learned from the existing case law in New York to prepare lenders for some of the defenses that borrowers may raise in foreclosure proceedings.
1. Wait for a payment default
Whenever possible, lenders should wait to commence foreclosure proceedings until the borrower has defaulted in the payment of debt service. Not only is a payment default easier to prove than a more fact-intensive covenant default, courts have also applied stricter standards in analyzing borrower defenses in the face of a payment default.
It is important that the basis of the default be a failure to pay principal or interest. If the default arises from the failure to pay taxes or assessments or from a defect in the manner of payment (as opposed to a failure to make the payment at all), the courts may not apply the same elevated level of scrutiny to the borrower’s defenses as in the case of a failure to pay debt service.
Where the borrower misses an interest or principal payment, courts have found that tendering payment even one day late is a valid basis for foreclosure. In fact, at least one court has allowed foreclosure based on a payment default even in the face of lender bad faith (where the bad faith was found not to be the cause of the default).
2. Don’t delay
While the case law supports the notion that delay by itself does not necessarily constitute a waiver of a lender’s right to foreclose, there have been cases where a lender was unable to foreclose after taking no action following a default and allowing the borrower to better the collateral, only to foreclose shortly thereafter.
The two cases — the 1949 decision in Caspert v. Anderson Apartments and the 1954 decision in Rockaway Park Series Corp. v. Hollis Automotive Corp. — each involved similar facts and achieved a similar result. In each case, the borrower defaulted by failing to cure violations against the property, but the lender provided no notice and took no action against the borrower for a substantial period of time (several years in one case and 18 months in the other). The borrower later removed the violations, and the lender allowed the borrower to complete the removal before declaring a default and commencing foreclosure. In each case, the court dismissed the foreclosure action.
The lesson here is that it is best to act promptly, especially where a covenant default is the basis for foreclosure. If the delay is substantial enough and if the borrower enhances the property in the meantime, a court could find that the lender is not entitled to foreclose.
3. Watch what you say
Even though your loan documents may say that they can only be modified by a written agreement signed by both parties, there are circumstances where the documents can be modified by spoken words, email or other statements or communications that do not necessarily amount to a written agreement.
Generally, New York law provides that a written agreement that contains a provision prohibiting oral modifications can only be modified in writing. But there are exceptions: the doctrines of part performance, waiver and estoppel.
A detailed analysis of each of these defenses is beyond the scope of this article (you can read more about them here); however, there is a common element to all three: the party asserting the defense must make detailed and specific allegations — vague, conclusory and unsubstantiated allegations of the statements or conduct constituting the oral promise are not sufficient.
So in order to succeed in this defense the borrower would need to clearly substantiate the claim, for example by presenting an email in which the lender explicitly promised to extend the loan.
The lesson here is to be careful what you communicate to a borrower who is in default. A prudent lender will avoid making promises or statements that might be construed as a modification of the loan documents, especially in an email, voicemail or other means that are easy to substantiate.