How to resolve prior mortgage issues on renewable energy projects

Contributed by Tricia (TJ) Jackson

Prior mortgages are typical due diligence items in the real estate title review process for renewable energy projects. Resolving issues related to prior mortgages is key to establishing a title policy that is satisfactory to lenders and investors while also protecting the project company’s real property assets. The following serves as an introduction to prior mortgages and the mechanisms for resolving them, but every project is unique, so the path forward will necessarily vary from project to project. While the process can be tricky, there are some key strategies that can keep the title curative and development process on track.

What is a prior mortgage?

Prior mortgages show up in the real estate title work on a commitment or a proforma provided by the title company in preparation for closing. As with a typical real estate transaction involving financing, lenders and investors will require that a title insurance policy be issued as a condition to their providing a loan or investment for a project. The title commitment is a commitment to issue a policy in that form, and a proforma is a draft of the ultimate policy to be issued at closing. Both should be reviewed in great detail for potential defects that need curing, otherwise known as “curative items.” Prior mortgages are high-priority curative items.

It is not unusual for a landowner to have an existing mortgage on a property that will be part of a renewable energy project site. Because the mortgage is prior in time to the project company’s lease or easement, it has superiority in the event of foreclosure due to default by the landowner. This means that if a landowner does not pay their mortgage on time or defaults in some other fashion, the landowner’s lender could take possession or force a sale of the property subject to the mortgage, potentially eliminating the project company’s interest on the land under their lease or easement. Mortgages often also have language that limits a landowner’s ability to build structures on the land or lease the property without the prior consent of the lender.

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How can prior mortgage issues be resolved?

  1. Non-Disturbance Agreement

A Non-Disturbance Agreement (NDA) is exactly what it sounds like – an agreement not to disturb property rights if certain conditions are met. These types of agreements can be stand-alone or in conjunction with a subordination, which is described in more detail below. The form of the agreement will need to be negotiated to the satisfaction of both parties, but essentially, the NDA will need to establish that the lender agrees to recognize the project company as a tenant or easement holder under the project company’s lease or easement and that the project company agrees to recognize the lender as the new owner of the property in the event of foreclosure.

  1. Subordination

In a subordination agreement, the landowner’s lender agrees to subordinate their lien position to that of the project company’s lease or easement. This means that even if a lender were to foreclose on its mortgage, the project company’s lease rights would be superior to the mortgage. In this case, the lender could not eliminate the project company’s interest on the property or force removal of the project facilities. As mentioned above, subordination agreements will usually also include non-disturbance language similar to that of an NDA.

  1. Release

A third option is to have the landowner’s lender release the portion of land that will be part of the project from the prior mortgage. At that point, the project land is no longer collateral under the mortgage, the landowner’s lender has no foreclosure rights on the land, and the project company can request that the title company delete the prior mortgage as an exception to the title work. This works well when only a portion of the land under the prior mortgage is expected to be part of the project, such that if the lender releases the project land, there will still be a sufficient amount of land remaining as collateral on the mortgage.

Negotiation Tips

While resolving prior mortgage issues can be burdensome, there are a couple of key strategies that could help get the lender on board. First, get the landowner involved in the process early, because the negotiations with the lender can take time. Explain to the landowner what you are trying to accomplish by resolving the prior mortgage and why it is important, and ask the landowner to communicate that information to their lender. Landowners may have positive relationships with their lenders, especially if the loan is with a small bank in a small town where everyone knows everyone. Don’t discount the value in those relationships.  Also, the project company’s lease or easement may require the landowner to help, typically at no cost to the landowner.

Once you’ve obtained the lender’s contact information, reach out, explaining what the project is and why it is important to the landowner and potentially to the overall community. Explain that the financing parties will require one of the three options listed above and that such financing is needed to develop the project. Let the lender know that the project company is willing to work collaboratively with them, and ask the lender what they will need from the project company to move forward.  You can also point out that the landowner’s financial position can only improve if the land produces more income.

About the author:

Tricia “TJ” Jackson is an attorney in Husch Blackwell’s Austin office and is a member of the firm’s Energy & Natural Resources industry team.

Source: Renewable Energy