Does non-recourse really mean, "no personal liability or personal recourse?" The answer is not always. An individual signing on behalf of the borrowing entity, Sponsor, isn't always immune from personal liability.
Non-recourse commercial real estate loans have exceptions within the loan documents that essentially transfer personal liability to the Sponsor for certain "bad boy" behaviors. Or, more specifically, there are personal guarantees required with non-recourse commercial mortgage loans.
Not only is the Sponsor personally liable for bad boy behaviors, individuals or entities providing limited guaranties or indemnification can still be liable. Typical exceptions to non-recourse, include:
- Losses for fraud or intentional misrepresentation
- Losses for waste
- Losses for misappropriation of tenant security deposits or rents
- Specific performance of the loan documents
- To foreclose and obtain title to the collateral
- To enforce any guaranty
- To enforce any indemnity
- To enforce any environmental indemnity
- To enforce any release of liability
- To obtain a receiver
- To enforce the assignment of leases and rents
- Losses regarding required insurance of the collateral
- Losses from the failure to pay over insurance proceeds
- Losses from the failure to pay over condemnation awards
- Voluntary bankruptcy or insolvency
- Involuntary bankruptcy or insolvency
While these are typical carve outs, each lender's loan documents will differ and each state will have their own legal interpretation of these documents and carve outs.
Examples where carve outs can affect Sponsor liability include*:
The lender may be able to sue the Sponsor if fraud or material misrepresentation affects the selling price of an asset creating a deficiency of proceeds to cover the loan.
Losses for misappropriation of tenant security deposits or rents: The lender can pursue its rights to the security deposits or rents as additional security under the loan documents. If the security deposits or rents are unavailable, then the lender is left with seeking a personal judgment against the borrower for the missing security, and the lender could pursue tort claims such as for conversion.
To enforce an environmental guaranty: An environmental indemnity will survive a non-judicial foreclosure sale. A lender may sue for money or to enforce an "environmental provision" (a representation or covenant concerning hazardous substances) without violating a state's anti-deficiency laws.
To enforce the assignment of leases and rents: In the event of a non-judicial foreclosure, the lender can still obtain pre-sale rents held by a receiver under an assignment of rents clause, up to the amount of the deficiency, since the assignment of rents is treated as additional security. (Simply suing the Sponsor prior to the non-judicial foreclosure sale for enforcement of the assignment of rents and lease provisions of a deed of trust is also allowable).
Losses regarding required insurance of the collateral: Insurance proceeds are treated as additional security that is available to the lender. The lender can seek a personal money judgment against the Sponsor for its breach of the loan documents.
Losses from the failure to pay over insurance proceeds: After a non-judicial foreclosure leaving a deficiency the lender can seek to recover insurance proceeds to which it is entitled under the loan documents. If recovering the proceeds from the Sponsor proved impossible, then the lender is left with seeking a personal judgment against the Sponsor for the missing proceeds. The lender could sue in tort for conversion.
While it seems non-recourse commercial loans have "teeth" when it comes to personally liability, it may not always be the case. In the event of a non-judicial foreclosure, if the lender bids at the sale and obtains the property, or if someone else purchases the property, the amount of bid must be deducted from the amount owing. If there is no deficiency, the lender has little recourse attempting to enforce any of the bad boy carve outs. Additionally, the lender will always need to prove its actual losses directly caused by breach of any bad boy provision.