Given all of the recent attention paid to residential foreclosures and regulations affecting residential mortgage loans, it is easy to lose sight of important changes impacting foreclosures of commercial property in Massachusetts.  

In August 2012, Gov. Deval Patrick signed into law “An Act Preventing Unlawful and Unnecessary Foreclosures.” Although the thrust of the new law, which went into effect last November, is directed at residential mortgage loans, and in particular “certain mortgage loans” considered “predatory,” the new law also affects how commercial foreclosures must be conducted in Massachusetts.

The new law requires that the foreclosing mortgagee be the holder of the mortgage before the notice of sale is first mailed. It also requires that all instruments evidencing assignment of the mortgage to the foreclosing mortgagee be recorded in the applicable registry of deeds where the land lies before the notice of sale is first mailed.

In addition, the notice of sale must reference with specificity the recording information of all assignments. It is not sufficient to simply list the book and page of the original mortgage followed by the words “as assigned of record” to the current holder.

The law also imposes new notice and modification obligations in connection with certain residential mortgage loans containing one or more so-called “predatory” features. Lenders are required to identify whether a loan is considered a “certain mortgage loan” under the law, and take reasonable steps and make good faith efforts to avoid foreclosure of such loans. Before publishing the first notice of sale, foreclosing mortgagees of residential mortgage loans must record an affidavit affirming that it has complied with the new requirements.

Some title insurance companies are requiring a commercial property mortgagee to also record an affidavit before first publication of the notice of sale stating that the mortgage being foreclosed is not subject to the new law since it secures a commercial loan secured by non-residential property. Lenders should check with their title insurance company before beginning foreclosure to determine their requirements.  

Buyers Beware

In addition, buyers of commercial property from a foreclosure sale may insist upon the affidavit since it shields third-party purchasers from liability for the mortgagee’s failure to comply with the law and protects title to the property against set-aside on account of such failure.  

The law allows third-party purchasers to conclusively rely that the creditor complied with the notice obligations if the affidavit has been recorded. Recording the affidavit removes the need for title companies and buyers to independently determine whether the mew requirements were applicable to the mortgage foreclosure.

The law also requires that a foreclosing mortgagee of residential mortgage loans determine that it is the holder of the mortgage note before commencing foreclosure. An affidavit to that effect must be recorded before publishing the first notice of sale.

Again, although the requirement does not expressly apply to commercial property securing commercial loans, many title insurance companies are requiring that the mortgagee record such an affidavit before he first publication of the notice of sale stating that the mortgagee is the holder of the note.  

Since the new requirement is deemed to be a codification of the Eaton decision, and since the Eaton decision applies to all foreclosing mortgagees (commercial and residential) some title companies have taken the position that the affidavit must be recorded in connection with commercial foreclosures. Buyers will also likely insist that the affidavit be recorded.

Given the simplicity of complying with the new sections, the concerns of third-party buyers and the requirements of some title insurance companies, the conservative and best approach is for foreclosing mortgagees of commercial properties to record the affidavits.  

It is important to note that recording the affidavits does not replace the need to record the so-called Eaton affidavit. The Eaton affidavit may, however, be recorded at any time prior to the recording of the foreclosure deed.

Attorney Christopher J. Currier, of counsel at Partridge Snow & Hahn LLP, focuses his practice in the areas of commercial lending, commercial workouts, real estate and business law. Email: cjc@psh.com