New York is a judicial foreclosure state, requiring the lender to sue the borrower in order to enforce their rights under the mortgage and note. If the lender wins, the judgment allows the lender to sell the property at auction, and proceeds from the sale are used to repay the debt. 

In connection with a real estate loan, a borrower may give the lender a secured interest in the property by way of a mortgage. A borrower may also provide a “pledge” of collateral, including a security interest in the entity which owns the property (or an entity that owns the property owner), which is often a limited liability company. 

In the residential context, or where the property owner is an individual, conventional lenders will almost universally proceed by way of a mortgage. In the commercial context, the use of mortgages and pledges have greater variance. By and large, a conventional first-lien lender will take a mortgage, and non-bank mezzanine lenders will take a pledge. Sometimes, however, first lien lenders will also take a pledge, and where permitted, mezzanine lenders may also utilise a mortgage. 

To initiate a UCC foreclosure, the lender must send the borrower and any guarantor a reasonable authenticated notice, which must include a reservation of rights. A reasonable authenticated notification must be reasonable in terms of how it is sent, its timeliness and content. Whether notification is sent within a reasonable time is a question of fact, except in non-consumer transactions, where a ten-day period is sufficient. New York UCC provides a safe harbour for meeting the notification requirement as long as both of the following conditions are met:

• “(1) not later than twenty days or earlier than thirty days before the notification date, the secure party requests, in a commercially reasonable manner, information concerning financing statements indexed under the debtor’s name” in the office appropriate to file a financing statement against the debtor covering the collateral as of that date; and
• “(2) before the notification date, the secured party: (A) did not receive a response to the request for information; or (B) received a response to the request for information and sent an authenticated notification of disposition to each secured party or other lienholder named in that response whose financing statement covered the collateral”. 

In a non-consumer transaction, a notification of disposition sent after default and ten days or more before the earliest time of disposition set forth in the notification is sent within a reasonable time before the disposition. A ten-day sale notice is not generally considered sufficient advance notice. 

In a non-consumer goods transaction, a notification must: “(1) describe the debtor and the secured party; (2) describe the collateral that is the subject of the intended disposition; (3) state the method of intended disposition; (4) state that the debtor is entitled to an accounting of the unpaid indebtedness and state the charge, if any, for an accounting; and (5) state the time and place of a public disposition or the time after which any other disposition is to be made.” The sufficiency of a notification that is missing any of these items is a question of fact.

See 2.2 Foreclosing on Pledged Equity.

The title owner of property encumbered by mortgage has the right to redeem the property at any time prior to the actual sale under a judgment of foreclosure.

In the case of redemption where a “pledge” is provided to the lender, and the lender initiates a non-judicial UCC foreclosure, the debtor or another secured party may redeem collateral as long as the secured party has not collected, disposed of or contracted for the disposition of, or accepted the collateral. To redeem the collateral, a person must tender fulfilment of all obligations secured, plus certain expenses, as well as full performance of all mature obligations. If unmatured secured obligations remain, the security interest continues to secure them as if there had been no default.

A real estate loan which has both forms of security (a pledge and a mortgage) is known as a “dual collateral loan”. 

In connection with dual collateral loans, lenders in New York may proceed simultaneously with a judicial foreclosure to foreclose a mortgage and a non-judicial foreclosure to foreclose on the pledged membership interest. So far, courts have rejected the argument from borrowers that simultaneously pursuing both mortgage and pledged interests would “clog” the borrower’s right of redemption (also referred to as “equity of redemption”) because the non-judicial pledge foreclosure will be resolved before the judicial mortgage foreclosure, meaning the borrower entity will effectively be controlled by the lender before the judicial process is complete.

However, New York does have a “one action rule” that limits a lender’s ability to foreclose on the mortgage and sue a borrower or guarantor on the note or guaranty simultaneously. If a lender forecloses, it must wait until it receives a deficiency judgment at the end of the judicial proceeding before it proceeds against the guarantor or borrower (unless it obtains leave of court to do so).

A lender may proceed in parallel to a foreclosure in connection with tort claims against other entities that caused its losses. For example, a lender may proceed against an affiliate of a borrower if that entity committed fraud in connection with a loan application.

A judicial foreclosure process can take anywhere from six months to three years from summons and complaint to auction, depending on the speed and efficiency of the courts in the county where the action is pending, the speed at which the plaintiff prosecutes the action, and whether the borrower has any defences to the debt.

A non-judicial foreclosure could be completed in a matter of weeks, but often they are completed in a few months. 

Lenders can pursue a deficiency judgment up to 90 days after a foreclosure auction. The deficiency is calculated by (i) determining the total amount owed, including the principal loan balance, interest due, and costs and disbursements, such as attorney’s fees, taxes paid by the lender, and other advances; and(ii) comparing the total amount owed to the net proceeds of the sale (after deducting foreclosure-related expenses, such as referee fees and advertising). New York law requires that the total amount owed also be compared to the fair market value of the property at the time of the auction. Whichever comparison yields a smaller deficiency will prevail.

For example, if the net sales proceeds are USD400,000, the total amount owed is USD500,000, and the fair market value is USD450,000, the deficiency would be USD50,000. The comparison to fair market value ensures that the lender cannot obtain a larger deficiency due to low action bids.

Once a deficiency judgment is obtained, the lender can pursue claims against the borrower and/or guarantor, to the extent such recourse is permitted under the loan documents.

The most common form of entity used in connection with real estate assets, including to facilitate joint ventures, is the limited liability company.

Whether joint venture agreements, including operating agreements, require co-operation between partners in a real estate joint venture depends on the drafting of a particular agreement. Some agreements will require co-operation. Others will define specific obligations, rights and remedies and will not include a blanket obligation to co-operate. Many sophisticated parties see real estate joint ventures as a contractual relationship which facilitates an investment relationship (often bringing together capital with expertise), rather than a true partnership.

Some joint venture operating agreements will retain, or remain silent on, the topic of fiduciary duties among members of the LLC. However, in many operating agreements among sophisticated parties, the parties disclaim fiduciary duties to each other. The parties may not disclaim the duty of good faith, which is implied in every contract in New York. Unless the contract’s terms cover a particular course of conduct, one participant’s efforts to cause a co-venturer to lose out on the benefit of its bargain, while not expressly violative of the terms of the agreement, may violate the covenant of good faith and fair dealing. 

Due to the flexibility provided to parties drafting an operating agreement, stalemates should be uncommon in connection with joint ventures. The operating agreement allows parties to give powers to managing members or managers, provide custom voting rules and include tie-breaking mechanisms. 

Still, stalemates do occur, especially in connection with older agreements or where agreements were drafted to memorialise long-running real estate partnerships. They also occur where certain “major decisions” require consent of the non-managing members. 

Courts have broad powers to break stalemates, including dissolution of the entity, appointments of receivers, and imposing other forms of equitable relief such as injunctions and court-ordered buyouts. Still, judges may be reluctant to exercise such powers, exacerbating the negative effects of stalemates.

New York law does permit the use of confessions of judgment. This device is rarely used, although some non-traditional lenders have deployed it. 

Operating agreements may also contain provisions which state that the parties agree that breach of certain terms will cause irreparable harm to the non-breaching party, or other language which would, in theory, help the non-breaching party obtain an injunction. In practice, courts are often unmoved by such clauses, and will require a party to establish each of the necessary elements (including a demonstration of irreparable harm caused by the conduct the movant seeks to enjoin) before the court will act pursuant to its equitable powers.

A New York LLC may be dissolved upon (i) an event specified in the operating agreement; (ii) consent of the members; (iii) judicial dissolution; or (iv) administrative dissolution by New York for failing to make required filings or pay necessary fees.

Before dissolving, the LLC must obtain tax clearance from the New York State Department of Taxation and Finance and then file articles of dissolution with the Department of State.

In connection with formally winding down LLCs, creditors should be notified, debts settled and assets distributed, in addition to formal requirements in connection with state and federal tax issues.

In practice, many parties may forgo formally winding down and dissolving LLCs due to the costs and work involved.

The most common guarantees are non-recourse carve-out (“bad boy”) and shortfall guarantees in connection with large real estate loans. Completion guarantees may also be utilised in connection with projects involving construction. 

New York courts will enforce non-recourse carve-out guarantees provided that the triggering event exposing the guarantor to full recourse liability has occurred. Unlike many other states, New York courts will also enforce broad waivers of defences by the guarantor as written in the guarantee documentation. Finally, New York allows for quick enforcement of guarantees – including non-recourse carve-out guarantees – through a summary judgment in lieu of complaint process that, under appropriate circumstances, can provide lenders with an expedited means of obtaining judgment against the guarantor, provided that the claims are solely for the payment of money.

Liquidated damages provisions in completion guarantees have been enforced in New York. Unlike completion guarantees requiring substantial or final completion of construction, liquidated damages provisions in completion guarantees can be enforced through New York’s summary judgment in lieu of complaint procedure because they are viewed as an agreement solely to pay money.

New York courts will enforce absolute or unconditional guarantees provided that they are not unconscionable (a high bar).

New York law generally upholds the parties’ freedom to contract to the terms of their choosing and, therefore, does not import defences to enforcement of an otherwise valid guarantee agreement. Broad language waiving defences on behalf of a guarantor is routinely enforced. 

Lenders have taken advantage of New York’s expedited summary judgment in lieu of complaint procedure, which is appropriate in connection with agreements for the payment of money only. Provided that the lender can show that the parties had such an agreement and the guarantor is in breach (or the triggering event in connection with a non-recourse carve-out guaranty has occurred), then courts are willing to enter judgment in favour of lenders on the ground that discovery is unnecessary.

New York does not have a one action rule requiring a lender to elect between foreclosing on the property and pursuing a guarantor.

Arbitration clauses are prevalent in many contracts involving real estate other than loan documents, which do not include arbitration clauses. 

Arbitration carries the main potential benefits of (i) the ability to select knowledgeable industry practitioners to serve as arbitrators, (ii) efficiency/speed and (iii) the potential for confidential proceedings in arbitration. Parties that incorporate expedited arbitration procedures stand to benefit most from potential efficiencies offered through alternative dispute resolution methods. In other instances, however, arbitration can be slower, less decisive, and more costly if the arbitrators do not exercise oversight and move the case along. This is particularly the case when New York federal courts and particularly the Commercial Division of the New York Supreme Court are well-regarded in handling complex commercial and contractual disputes.

Mandatory mediation clauses are relatively rare. However, certain construction-related form agreements, including those produced by the American Institute of Architects, often include mandatory mediation as part of the dispute resolution procedures. 

The most common provisional remedies used in connection with disputes in New York are temporary restraining orders and preliminary injunctions. To obtain these remedies, a party must establish likelihood of success on the merits of its claims, irreparable harm if the relief is not granted, and that the balance of the requisites favour the movant. 

Courts often require the movant to post a bond which would provide a remedy to the non-moving party if it turns out the injunction was improper or inappropriate.

In addition, there are two provisional remedies that often come up in the context of real estate disputes. The first is the appointment of a receiver. The court may appoint a receiver if there is a danger the property or assets will be lost, injured or dissipated. Receivers act under court supervision, with powers generally defined by court orders. The use of receivers is generally limited to complex cases, or cases with property or assets that are very valuable, given that receivers can be costly and invasive.

The second provisional remedy that comes up in real estate is the notice of pendency, also referred to as a lis pendens. A lis pendens clouds title where an action is filed that affects title, possession or use of real property.  The filing is ministerial and does not require the showing or meritorious claims. 

See 7.1 Types of Provisional Remedies in Real Estate Disputes.

The court will decide whether a temporary restraining order, preliminary injunction or appointment of a receiver is warranted. However, a court will not weigh in on the propriety of a lis pendens before it is filed. An improper or frivolous filing could be cancelled by the court and it may order the filer to pay costs and fees.

New York courts will grant injunctions in connection with real estate transactions if the movant establishes the following three elements: likelihood of success on the merits of its claims, irreparable harm if the relief is not granted, and that the balance of the requisites favour the movant.

Courts assessing irreparable harm will often evaluate the injury that cannot be adequately compensated by monetary damages or remedied at law after the fact. Courts will also look at the imminence of the harm and whether it is likely to occur or is, on the other hand, speculative.

These standards are often found when the court is deciding a dispute related to the ownership, use or possession of real property as real estate assets are unique and have irreplaceable value. Other instances where irreparable harm is often found are (i) where a business’s good will and reputation will be damaged, (ii) in connection with the disclosure of trade secrets or competitive advantages or (iii) where a business would shut down if not for preliminary injunctive relief.

New York’s lien law permits the use of mechanic’s liens, which are statutory devices designed to protect the interests of persons who furnish labour and materials for a construction project. To file a mechanic’s lien, a notice of lien must be filed with the county clerk where the property is located within eight months of the last work performed for commercial projects, and four months for single-family dwellings. The filer must then serve the lien on the property owner. 

Foreclosure on a mechanics lien is a judicial process. A lien holder may file a summons and complaint in court to commence the action, along with a lis pendens to cloud title during the pendency of the action.

Following resolution of the merits, the lienholder may obtain a judgment of foreclosure and sale, which allows a public auction to be held.

In recent years, private equity and REITs have invested in portfolios of single-family residential homes for rentals (SFR). Some portfolios offer rent-to-own opportunities. Civil litigation has proliferated in connection with these portfolios. 

As a general matter, investment funds are often subject to SEC oversight and regulation. In addition, as it pertains to residential real estate, federal fair housing and anti-discrimination laws must be complied with, as well as state and local landlord-tenant laws. 

Actions against funds which own portfolios of SFRs come in different forms, including (i) conflicts with tenants regarding maintenance, hidden fees, misrepresentations, the enforceability of clauses requiring tenants to make certain repairs, and the applicability of implied warranties of habitability to rent-to-own arrangements, (ii) litigation brought by housing advocates regarding market impact and (iii) regulatory pushback from the Consumer Financial Protection Bureau and states attorneys general regarding predatory practices and hidden fees.

The public interest plays a key role in the practice of real estate litigation in New York. The conversation surrounding the public interest and normative values is front and centre in issues dealing with statutory tenancies and tenant rights, creditor rights, environmental, ESG, and zoning issues, the availability of bankruptcy protection, monetary policy and interest rates, and many other areas. Moreover, real estate litigators often incorporate public policy arguments in their presentations to courts and regulators.