Commercial Mortgage Loan – Shocking Clause

Many borrowers that have a commercial mortgage loans with smaller or regional banks are often shocked to learn that they have signed off on a clause referred to as the “Right to Offset”.  This clause is only relevant to banks that hold deposits from borrowers.  Meaning the bank hold checking or savings accounts with the borrowers. 

It’s often the case that in order to get a commercial loan whether a commercial mortgage or an unsecured loan that the borrower will have to have at least some of its deposits (if not all of its deposits) with the bank.    What this clause allows the bank to do is “offset” their losses by taking money directly out of the borrower deposits/account without their immediate consent.   The bank will use this cash to paydown debt the borrower has with the bank. 

And the bank normally takes the money out of the account in the most shocking of ways – by simply taking the money without telling the borrower who almost always finds out when they happen to check their balance and see a big fat zero. 

From the banks perspective they are protecting their capital and their investment.  From the borrowers perspective they are often shocked that the bank can do this, which is of course very legal.  The borrower agrees to this right when they signed off on the note. 

Ironically this right is normally only exercised during the worst of times for the borrower.  When their business is against the ropes and they need what money they have left more than any other times. 

One potential solution for the borrower to avoid this potential issue is to get a commercial mortgage from a non depository lender or bank.  There are many out there and they are normally large national banks. And normally do not have branches.

 

 



Repossession