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Firm News Real Estate

Real Estate Secured Note Purchases – You’ve Purchased the Note, Now What?

In the first two installments of our three-part series of articles addressing the various issues that arise in connection with real estate secured note purchase transactions, we first discussed the general framework and issues related to all note purchase transactions  and then looked more specifically at issues unique to the purchase of commercial mortgage backed securities (“CMBS”) notes.  This article explores the options available following the acquisition of the note, and identifies some potential pitfalls that note purchasers should be prepared to address.

So, you’ve purchased a note secured by real property – what to do now?  A purchaser acquires the note for any number of reasons, but it will (nearly) always lead to dealings with the borrower.  Upon the completion of the note purchase, the purchaser typically sends the borrower a “hello” letter, putting the borrower on notice that the purchaser has purchased the note and providing the borrower with the contact information for payment and notice purposes pursuant to the loan documents.  The purchaser will likely have determined how it intends to proceed with (or against) the borrower. 

If the borrower declines to cure defaults and offers no agreeable methodology for settling claims, the primary option available to a note purchaser is to institute foreclosure proceedings to acquire title to the real property.  A noteholder should be prepared for the borrower’s efforts to thwart lender’s attempts to secure its rights under the note such as seeking a restraining order or filing bankruptcy. Prior to undertaking foreclosure proceedings or other actions against the borrower, the noteholder should assure that it has analyzed all third party relationships and other property related matters (indeed, these activities are best undertaken prior to the purchase of the note as detailed in our prior newsletter articles). The completion of a foreclosure sale can, under certain circumstances, have unintended and potentially disastrous results. For example, certain leases may be terminated by a foreclosure unless preemptive actions are taken, thereby potentially impacting the value of the asset. If the noteholder has taken the proper precautions, it can exercise all of the remedies available by complying with all requirements imposed by the loan documents and applicable laws related to the foreclosure of real property, such as notices to borrower, filing of the foreclosure action, and undertaking the actual sale, for instance. 

Immediately after the completion of a foreclosure sale, the noteholder will stand as the owner of the property and should immediately take all activities to secure the property and its valuable elements. For example, the noteholder (as the new “landlord” under any leases related to the property) should contact all tenants informing them of its acquisition of the property, directing that rent payments and notices to landlord be sent to the noteholder.  In this regard, it is important to review the provisions of the leases prior to taking any actions to determine any specific language which needs to be included in the letter to assure that the leases are either retained or terminated pursuant to the specific case facts and desires of the landlord.

It should be noted that dealing amicably with the borrower is often possible, and the particular circumstances of a relationship with the borrower may eventually lead to a settlement of a payment of the note at a discounted amount or a “friendly foreclosure” which will save all parties time, money and aggravation.  An option available to all lenders is to determine if any workout can be achieved with the borrower. Given some of the pitfalls and delays which can be involved with the other options available to the purchaser, these types of borrower-friendly transactions can often be the best case scenario, as they can be more expeditious and economical than the more contentious alternatives.

We are hopeful that our three part series has been helpful in addressing the opportunities which can be realized in the acquisition of promissory notes which are secured by real property. The interested reader should understand that these articles have been general in scope given the depth of substance and the varying fact situations potentially involved in these transactions. We encourage any reader which has specific interest and inquiries to contact the authors at their convenience.

By:  Jeffrey J. Porter and Jeff Mosteller

Categories
Real Estate

New Order Changes Treatment of Minerals in Texas Title Policies

Purchasers of real property secure title insurance to protect themselves against adverse claims to their land. Because mineral rights can be leased or deeded separate from the surface estate of the property, such rights can create an interest adverse to the property owner. Texas title companies and owners have been struggling with how to address mineral interests in title insurance since the recent resurgence of mineral development in Texas. Finally, the Texas government has settled the dispute.

On August 12, 2009 the Texas Department of Insurance adopted Order No. 09-0650 which introduced certain changes to the Basic Manual of Laws, Rates and Forms for the Writing of Title Insurance in the State of Texas. In doing so, the order significantly affects the way title companies and property owners address issues involving mineral rights in Texas title policies.

New Rule – Excepting to Minerals

First, the order creates a new procedural rule, Rule P-5.1, which permits title companies to generally except to insuring mineral rights in Texas title policies. It should be noted that when referring to mineral rights in the context of P-5.1, the term “minerals” includes “coal, lignite, oil, gas and all other minerals in, under and that may be produced from the land together with all rights, privileges and immunities relating thereto.”

P-5.1 permits a title company to except minerals from coverage of a title policy in two ways. First, a title company may specifically exclude minerals from the description of the insured estate in Schedule A, Item 2 of the policy. Also, P-5.1 allows a title company to generally except to minerals in Schedule B as a separate and distinct title exception, in addition to any mineral leases or severed mineral rights specifically listed in Schedule B of the policy.

Given the broad definition used for the description of “minerals” under P-5.1, landowners are exposed to significant risks which may arise from the future development of minerals which have either been leased to third parties or severed from the surface estate. However, while the title to minerals and related rights can be excepted from title coverage, a land purchaser can receive title protection for the improvements existing on, or to be built on, such land through endorsements.

New Endorsements Available.

Procedural rule P-5.1 requires title companies, upon request by the insured, to issue one or more applicable endorsements as provided in procedural rule P-50.1. Procedural rule P-50.1 introduces two new title endorsements that insure minerals otherwise excepted in the policy. These endorsements operate similarly, but are applicable in different situations.

The T-19.2 endorsement, titled “Minerals and Surface Damage Endorsement,” is available for real property of one acre or less, whether currently or intended to be improved for use as a one-to-four family residential property. The T-19.2 endorsement is also available for real property improved or intended to be improved for office, industrial, retail, mixeduse retail/residential or multifamily purposes. Any other type of real property not specifically permitted coverage under T-19.2 is eligible for the T-19.3 endorsement, also titled “Minerals and Surface Damage Endorsement.”

The two endorsements generally provide the same coverage. Each endorsement insures against loss by reason of damage to improvements resulting from the exercise of a right to use the surface of the land for the extraction or development of minerals. One notable feature of both endorsements is that they protect against damage to improvements existing not only as of the date of the policy, but also those improvements added to the property in the future. However, any mineral interest causing the damage to improvements must exist as of the date of the policy and be specifically excepted to in either Schedule A, Item 2, or in Schedule B. Notably, there is one minor difference between the T-19.2 and T-19.3 endorsements. While the T-19.2 generally protects against damage to all improvements (excluding only lawns, shrubbery or trees), the T-19.3 protects only against damage to permanent buildings. Therefore, any improvements that are not permanent buildings would receive protection only under the T-19.2. Each
endorsement requires the payment of a $50.00 premium.

Potential Cost Savings for the Insured

Prior to availability of the T-19.2 and T-19.3 endorsements, owners relied upon the T-19.1 endorsement for protection against any mineral exceptions. The mineral protections in the T-19.1 endorsement reflect those provided in the T-19.2. However, the T-19.1 endorsement provides additional protections beyond minerals, and in certain situations, those protections could exceed the needs for the specific property. Generally, if the insured property is unimproved and no applicable covenants or conditions are listed in the title commitment, a T-19.1 endorsement may not be the most cost effective method of mineral insurance. Since the title premium for the T-19.1 endorsement on nonresidential property is either 10% or 15% of the basic rate for a single issue policy, the cost of the T-19.1 would far exceed the $50.00 cost of a T-19.2 or T-19.3 endorsement.

Conclusion

Beginning November 1, 2009, title companies will begin generally excepting to minerals and all rights related to those minerals in Texas title policies. The new endorsements provided by procedural rule P-50.1 will be necessary to protect property owners from the risk of development of minerals on their properties.

By Brian H. Baker and Jeffrey J. Porter

Categories
Firm News

SettlePou Shareholder, Jeffrey J. Porter, Named as Fellow of the Dallas Bar Foundation

SettlePou is proud to announce that shareholder, Jeffrey J. Porter, was recently honored by being named a Fellow of the Dallas Bar Foundation. Fellows of the Dallas Bar Foundation are Dallas attorneys who have distinguished themselves in their legal careers and in their civic contributions. Mr. Porter’s nomination by a current Fellow represents an acknowledgment of his commitment to service, education, and philanthropy. The formal induction as a Fellow took place at the eighteenth annual Fellows’ Luncheon held at the Belo Pavilion on March 25, 2009. Jeffrey J. Porter has been practicing law for 29 years and is Chair of SettlePou’s Real Estate section.