Chapter 14 Mortgage Modifications

• Library: Practical Guide to Commercial Real Estate in South Carolina (SCBar) (2024 Ed.)

Chapter 14 Mortgage Modifications

M. Kevin GarrisonMaura A. Greg

From time to time, an attorney will become involved in a commercial transaction requiring the modification of an existing mortgage filed of record. A mortgage modification may be required in order to, among other reasons, (i) amend existing terms of a loan, (ii) add or release collateral securing a loan, (iii) decrease or increase the dollar amount of the promissory note or notes secured by the mortgage, or (iv) amend the mortgage to correctly identify the parties to a loan. Regardless of the reason, an attorney involved in a mortgage modification must take into account several issues before proceeding to modify a mortgage.¹

A. Review of Existing Loan Documents and Modification Terms

The attorney charged with handling a mortgage modification, regardless of whether he or she represents a lender or borrower, will need to review certain loan documents associated with the original loan. These documents should include, but are not limited to, the following: (a) the promissory note or notes evidencing the original loan, (b) the original recorded mortgage securing the note or notes, (c) the original loan agreement, if any, executed in connection with the loan, and (d) any guaranty agreements executed in connection with the loan. These previously executed documents are essential in order to allow an attorney to correctly prepare a mortgage modification agreement. The attorney should also obtain from the lender a copy of the lender's term sheet or commitment letter to identify the terms of the original loan and loan modification in order to determine what changes to the existing mortgage are required.

1. Identification of the Parties

The original promissory note, mortgage, loan agreement and guaranty agreements should identify all parties to the original loan to allow an attorney to begin preparing all necessary documents related to the mortgage modification. The original recorded mortgage should be specifically reviewed to determine if the mortgagor is one and the same as the name of the borrower shown on the note. If not, the attorney must determine if the original mortgagor, as owner of the mortgaged collateral, will be a party to the loan modification.

From time to time, a review of the original loan documents when compared with the loan modification term sheet or commitment letter will indicate that the names of the original parties to the loan have changed. Some examples of such name changes are as follows:

a. Original borrower is an unincorporated association and converts to a corporate entity such as a corporation or limited liability company; or

b. Original lender changes its name or merges into another lending institution; or

c. Original borrower is an individual and subsequently transfers its property mortgaged as collateral for the original loan to another person or entity.

These name changes should be addressed in the modification documents to correctly identify the current parties to the loan or possibly add other required parties to the loan and mortgage modification. Once the parties required for the mortgage modification have been identified, the attorney can proceed with reviewing the remaining terms of the loan modification in order to begin drafting the mortgage modification agreement.

2. Identification of the Collateral

The original mortgage of record will also identify the original collateral pledged by the borrower to secure the payment of the original promissory note. The lender's attorney should obtain from the lender a copy of the prior title insurance policy or title opinion issued by the borrower's attorney. After review, the lender's attorney should contact the borrower's attorney to obtain a title update for the prior title policy or title opinion to determine if there have been (i) any changes to the original collateral (such as a partial release of collateral or a subdivision of the real property originally mortgaged), (ii) subsequent liens placed on the collateral, or (iii) changes in the ownership of the original collateral. If the mortgage modification will involve the addition or release of real property, the lender's attorney should obtain the following information from the borrower's attorney: (i) a 60-year title search on any new real property being pledged as collateral for the loan, (ii) an opinion of title or title insurance commitment setting forth all exceptions affecting title to the new real property along with copies of such title exceptions, (iii) copies of all plats identifying the additional collateral or describing any collateral to be released from the lien of the existing mortgage, and (iv) the correct name of the entity or person holding title to the existing real property collateral or to the new real property to be added as collateral.

3. Review of Note Modification Terms and Note Modification Agreement

After reviewing the original loan documentation, the attorney must then proceed with reviewing the lender's term sheet, loan modification commitment letter (if available), and the proposed note modification agreement (if prepared by the lender) to make sure these documents correctly identify the modification terms agreed to by the parties. The attorney should pay careful attention to the agreed upon modification terms if drafting the note modification agreement to make sure any drafted changes to the payment terms, interest rate, maturity date or loan amount reflect the modification terms agreed to by the parties. If the title update or review of the original loan documentation indicates that the collateral is incorrect or the names of the parties to the loan are different, the lender's attorney should immediately address any such discrepancies with the lender, as well as the borrower's counsel, before any of the parties execute the note modification agreement. It may be difficult for a lender or borrower to unwind or amend a loan modification if the parties have already agreed to any incorrect terms set forth in a note modification agreement.

B. Drafting Concerns and Pitfalls Relating to Mortgage Modifications

The attorney charged with preparing a mortgage modification agreement on behalf of a lender must be aware of several drafting issues in South Carolina which may affect the validity of the instrument. A sample mortgage modification agreement is set forth in Exhibit A.

1. Parties to be Charged and Authority to Execute Documents

As previously stated, it is important that all required parties to a loan modification be identified in order to have the correct parties execute the mortgage modification agreement. Each required officer, member, manager, partner or agent of a corporate entity involved in the modification should have the proper authority to execute the modification documents. Both the borrower's attorney and the lender's attorney will need to review all appropriate resolutions from the respective entities to determine if the loan and mortgage modifications have been approved by each entity's respective shareholders, members or partners. A certificate of good standing should also be obtained from the office of the secretary of state in which the corporation was incorporated or the limited liability company was organized to verify that the company is still in existence and in good standing with the state in which it was formed. Most title insurers will have a good checklist of items required for closings when corporate entities are involved in a real estate transaction. In the event the lender does not have its own standard corporate, LLC, or partnership resolution form, the lender's attorney should require the borrower's attorney to provide a resolution from each borrower entity authorizing the mortgage modification. Resolutions should also be obtained from all corporate entities serving as shareholders, members, managers, or partners of a corporate borrower or guarantor entity. Examples of the documentation needed for review include:

a. Corporation: Articles of Incorporation, bylaws, resolution of shareholders approving loan modification, list of any loans from shareholders to the corporation, and certificate of existence/good standing.

b. Limited Liability Companies: Articles of Organization, operating agreement, resolution of members or managers approving loan modification, list of any loans from members to the LLC, and certificate of existence/good standing.

c. Limited Liability Partnerships: Certificate of Authority, limited liability partnership agreement, resolution of general partners approving loan modification, list of any loans from partners to the LLC, and certificate of existence/good standing.

d. Limited Partnerships: Certificate of Limited Partnership, Affidavit of General Partner's Authority filed of record in county in which it owns real property, limited partnership agreement, and certificate of existence/good standing.

e. General Partnerships: Memorandum of Partnership (if filed of record in county in which it owns real property) and partnership agreement.

Additionally, if the mortgagor is not the borrower but a pledgor, the attorney for the lender should make sure that the mortgage modification agreement includes language stating that the pledgor has acknowledged its agreement to pledge its real property as collateral for the borrower's loan and that it has received valid consideration for its pledge. An example of a pledgor affidavit is set forth in Exhibit B.

2. Guarantors

Guarantors of a loan can pose an additional risk for lenders in a mortgage modification. The attorney must review (i) the loan modification terms to determine if any of the original guarantors are to be released or if new guarantors are to be added, and (ii) the original guaranty agreements to determine if the guarantees were limited to a specific note, specific dollar amount or were unlimited for all loans between the borrower and lender. In Branch Banking and Trust Company of South...