How Can I Possibly Be Liable For A Non-Recourse Loan?

Just because the lender agreed to a loan being non-recourse does not mean that giving the mortgage lender the keys to the failed real estate project is the end of the story. Individuals or entities who signed an indemnity as to "bad boy" carve-outs (or guaranty of recourse obligations) may find themselves liable for repayment of what was always described as a non-recourse loan. The loan documents may contain a nonrecourse statement, but that statement is almost always subject to exceptions.

Traditionally, only intentional misconduct on the part of the borrower, such as waste (meaning allowing physical deterioration of the mortgaged property), fraud, misapplication or diversion of funds, material misrepresentation or intentional interference with the lender's ability to foreclose on collateral, would terminate the protection of a non-recourse loan enjoyed by the borrower. The theory was that it would be unfair to the lender to protect a borrower if that borrower intended to interfere with repayment of the loan. There was an element of "bad" behavior that converted the otherwise nonrecourse loan and rendered the borrower liable. Many people still believe that the exceptions to a non-recourse loan remain so narrowly defined. Increasingly, lenders have been able to broaden the circumstances under which a guarantor or the borrower will be deemed to have waived non-recourse protections, and many people are now surprised to find that there are so many circumstances where the non-recourse protection is terminated and therefore the loan is basically a full recourse obligation.

One must concentrate on the exceptions to non-recourse liability. The exceptions control whether one can walk away from a failed project without liability, face liability based on harm from certain actions, or face full recourse liability. A careful consideration of the facts and the loan covenants is necessary.

Exceptions to Non-Recourse Liability

Lease termination may trigger liability. A tenant's failure to pay rent and abandonment of the leased property was held not to be a lease termination by the landlord without the lender's consent in a recent California case. See GECCMC 2005-C1 Plummer Street Office Limited Partnership v. NRFC NNN Holdings, LLC, 204 Cal. App. 4th 998 (2012). However, if the landlord had signed a termination agreement based on the idea that he was merely acknowledging the reality of the circumstances, he would have triggered full recourse liability.

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