November 16, 2014
Authored by: Jay Krystinik and Keith Aurzada
Lenders are frequently confronted with questionable lender-liability claims not only from borrowers (usually in connection with collection or foreclosure procedures) but also from property managers unable to recover from borrowers. Claims property managers assert directly against lenders include those for breach of oral or written contract, fraud, and unjust enrichment (particularly if the lender has foreclosed its interest in the borrower’s property). Lenders can hedge against the risk of claims by property managers through a variety of methods, both pre- and post-borrower default.
As part of origination (or any subsequent review of the borrower’s property management agreement), the lender should ensure that the property management agreement clearly defines that the property manager can turn solely to the borrower for satisfaction of the property manager’s fees and expenses. Thorough property management agreements will also cap expenses the property manager is allowed to incur absent approval, which can help avoid successful assertion of contractor liens.
The lender can also obtain a three-party subordination agreement among the lender, borrower and property manager that subordinates the property manager’s rights to those of the lender and allows the lender to, among other things, (i) seize rents immediately upon default, and (ii) terminate the