Enforcing A Security Agreement Against Real Property

A security agregally binding contract usually executed between a borrower and lender, where the borrower grants a security interest over the borrower’s property to the lender as collateral for the loan. Security agreements may cover personal and real property as collateral such as receivables, business equipment, and inventory.

Once the borrower defaults on its payments to the lender, the lender can enforce the security agreement against the property for as long as the security interest is perfected. Perfection of the security interest is required in order to create a priority of the lender’s lien towards the property. If the security interest is not perfected, another creditor who has a later security agreement but an earlier perfected security interest will have priority over the collateral.

Perfection of a security interest

For a lender to perfect the security interest over the collateral, it must either file a financing statement, possess the collateral, or control the collateral. Sometimes, perfection of the security interest is done automatically upon attachment and execution of the security agreement.

In cases of real property, however, perfection of the security interest is done by recording the mortgage under Real Property Law. The recording of a mortgage under Real Property Law will give the lender priority over later recorded liens.

Enforcing a security interest over real property

To enforce a security agreement against real property in New York, the lender must follow the strict procedures laid out under Real Property Law for foreclosure. The procedure would depend on whether the property is residential or commercial.

For residential properties, the lender needs to send a notice of default and demand for payment (also called a pre-foreclosure notice) 90 days before filing a foreclosure action. When the borrower fails to cure the default within the period prescribed, the lender can file the foreclosure case.

Filing a foreclosure action vs. enforcing a promissory note

Under New York law, a lender has the option to either file a foreclosure action or enforce a promissory note. Filing a foreclosure action precludes the lender from enforcing the promissory note. For this reason, it is important, when filing a foreclosure action, to ensure that the value of the property is more than the debt. If the value of the property is less than the debt, the lender will not be able to claim the unpaid debt from the borrower’s other properties.

Enforcing a promissory note in New York is a faster procedure due to the expedited process under CPLR § 3213. Enforcing a promissory note does not even require a filing of a complaint. The lender can immediately file a notice of motion for summary judgment together with its supporting documents. The borrower is then given the opportunity to reply to the motion by raising its defenses. Filing a motion for summary judgment in lieu of a complaint dispenses with the longer procedure of filing a complaint and answer. When the lender enforces a promissory note, the lender, once it secures a favorable judgment, can execute it against all non-exempt property of the borrower until the total debt is satisfied.

Enforcing a security interest when there is already a foreclosure action over the real property

When there is already a foreclosure action pending over the real property with a security interest that has priority, the lender’s recourse is to claim entitlement to the surplus under surplus money proceedings in Real Property Actions and Proceedings Law § 1361.

When the obligation to the creditor with a priority lien is satisfied and there is excess, a surplus money proceeding can determine who is entitled to the excess from the claims or competing claims of other creditors.

Enforcing a security interest over real property can be a complex process which requires the expertise of an experienced lawyer. Navigating it by yourself can be tricky because foreclosing property requires following strict procedures, which if not observed, can lead to a dismissal of the case and the need to re-file the action once proper procedures are met. If you are a lender who needs to enforce a security interest over real property, we at the law offices of Albert Goodwin are here for you. We have offices in New York City, Brooklyn, NY and Queens, NY. You can call us at 212-233-1233 or send us an email at [email protected].