The “dual collateral” approach is becoming a popular model of documenting real estate loans by lenders. Under a dual collateral loan, a lender obtains two separate pieces of collateral for the loan: a mortgage against the real estate and a pledge of the ownership interest in the entity holding title to the real estate.

Lenders favor the “dual collateral” approach because it allows a lender to take assignment of the title-holding entity and sell the property under the Uniform Commercial Code (UCC) in satisfaction of the loan in a shorter time frame than a conventional foreclosure of the property.

There are three important negotiating points for a borrower to consider in the term sheet or loan agreement for a dual collateral real estate loan.

First, a borrower should specify the procedure that a lender must follow in conducting a UCC sale of the property. Specifically, a borrower should request that a lender: (1) engage a broker to market the property prior to the sale, (2) specify how long and in what manner the property should be marketed for sale, (3) specify the terms of the sale, (4) identify the amount that the lender is required to bid at the sale, and (5) specify the procedure for determining any deficiency if the lender takes back the property at the sale.

Second, a borrower should require that a lender give advanced notice prior to conducting any UCC sale of the property. This specified length of time of the advanced notice should be sufficient to allow a borrower to refinance the transaction prior to the date of the UCC sale. The UCC, by default, requires only 10 days’ advance notice of a UCC sale of real property collateral. Thus, borrowers should specifically negotiate for enough advance notice to respond to a scheduled UCC sale.

Third, a borrower should refuse to waive its right of redemption under Section 9-623 of the UCC. This section permits a borrower to “redeem” its collateral real estate by fulfilling all obligations secured by the collateral, and paying reasonable expenses and attorney’s fees. The redemption may occur at any time prior to the UCC sale. This right of redemption can allow a borrower to save its collateral from a scheduled sale, notwithstanding that a default may have occurred. A borrower should be careful not to waive this right.

For more information regarding real estate loans and financing, or real estate transactions in general, contact Robert Kravets at rkravets@foxrothschild.com or 215.918.3621.