Understanding Foreclosure Redemption Periods for Commercial Real Property in Wisconsin

Samuel M. Draver
sdraver@kmksc.com
(414) 962-5110

For lenders seeking to foreclose on real property collateral in Wisconsin, understanding the applicable statutory “redemption period” is an important part of the timing involved in the recovery of assets and the protection of collateral, and often helps minimize financial loss. One of the critical decisions a lender will be required to make when filing suit is whether or not to reserve the right to seek a deficiency judgment against the borrower if the property sells at sheriff’s sale for less than the debt owed. This choice has a direct impact on the length of the “redemption period” and how quickly the lender can schedule a sheriff’s sale of the property.

What is the Redemption Period?

The redemption period refers to the period during which the borrower may redeem property by paying off the loan secured by the collateral and thus protects the borrower’s equity or other interests in the real estate. Technically, in Wisconsin, a borrower has the right to redeem the property up until the time of the confirmation of sale hearing, when the circuit court confirms that the amount bid at the sheriff’s sale was “fair value” for the borrower’s interest. However, the phrase “redemption period” is generally used as shorthand to refer to the statutory period set by the Wisconsin legislature between the time the court enters the judgment of foreclosure and the earliest point when the lender is allowed to conduct a sheriff’s sale. The length of this colloquial “redemption period” varies depending on factors such as whether the property is residential or commercial, whether the property is the borrower’s homestead, and whether a deficiency judgment is sought.

For the balance of this article, we will dispense with the quotation marks and use redemption period to describe this statutory period leading up to the time of the sheriff’s sale, but lenders should remember that the borrower’s right to redeem extends beyond the time of the sale up until the hearing on confirmation of the sale.

Wisconsin’s Statutory Redemption Periods for Commercial Real Property

This article is focused on commercial property, but another caveat must be mentioned here: Wisconsin foreclosure law applicable to commercial property in fact describes the property involved as “real property other than a one-family to 4-family residence that is owner-occupied at the commencement of the foreclosure action, a farm, a church, or a tax-exempt nonprofit charitable organization.” If the property involved falls into any of the above-listed types of properties, even if it is used for commercial purposes, then the redemption periods discussed in this article do not apply. (Different redemption periods apply to above-listed types of properties.) With that understanding of commercial property referred to here, we proceed.

Under Wis. Stat. § 846.103, the redemption period for commercial real estate is determined as follows:

• Deficiency Judgment Sought: Six-Month Redemption Period (Sec. 846.103(1))

If the foreclosing lender retains the right to pursue a deficiency judgment against the borrower, the redemption period is six months from the time of entry of the foreclosure judgment. This means that the lender cannot schedule the sheriff’s sale date to be less than six months from the date of the judgment. While this is double the time if the right to a deficiency is waived (discussed below), it can be advantageous to lenders for various reasons. A longer redemption period will give the borrower more time to explore refinancing, sale of the property, or a potential settlement with the lender. It also provides lenders with more time to assess the market conditions, plan their asset recovery, and complete any legal or administrative process prior to proceeding with a sale where it might take possession of the property.

• Deficiency Judgment Waived: Three-Month Redemption Period (Sec. 846.103(2))

If the lender waives its right to a deficiency judgment against the borrower, the redemption period is three months from the entry of the judgment, allowing for a quicker foreclosure process. Waiving the deficiency is often the best choice where the lender is reasonably confident that the purchase price at the sheriff’s sale is likely to exceed the amount of the lender’s debt. This may also be the right choice if the lender believes the borrower has no other recoverable assets from which to collect on a deficiency judgment, i.e., where pursuing a deficiency judgment would be costly and impractical. Key Tip: For a lender to be able to elect to waive the deficiency, the mortgage being foreclosed must specifically grant the lender the right under the statute to waive the deficiency, and the lender must elect to waive the deficiency at the time the foreclosure complaint is filed. If these requirements are not met, then Wisconsin law requires that the borrower have the longer, six-month redemption period before the sale can be held.

Key Factors for Lenders to Consider When Deciding About the Redemption Period

• Decline of the Property & Receivership.

On a commercial rental property, a borrower might begin using rents for purposes other than paying for property maintenance, insurance, taxes and the lender’s loan. Or, foreclosure properties may be left vacant or otherwise deteriorate due to waste, particularly in a commercial context if the borrower has closed operations. Under Wis. Stat. § 813.16, lenders can petition the court for the appointment of a receiver to manage the property, collect rents (and use rents to pay for maintenance, insurance and taxes), and safeguard asset value until the redemption period expires. A receiver is a helpful tool at the lender’s disposal to maintain the asset and keep the property marketable. But Note: Wisconsin foreclosure law suggests that if the lender waives the right to a deficiency and shortens the redemption period, the borrower should be allowed to remain in possession and collect rents during the case unless the borrower abandons the property. But there are also techniques and circumstances where a receiver can be obtained even if the deficiency is waived.

• Market Conditions & Sale Strategy.

Given the different redemption periods, lenders may want to factor in prevailing market conditions as they decide whether to waive deficiency rights and seek a shorter redemption period. When commercial property values are stable or appreciating, a lender might prefer a three-month redemption period so that they can achieve quicker sales. On the other hand, in uncertain market conditions, a longer redemption period may allow for pursuit of alternative recovery measures.

• Tax and Insurance Issues.

Borrowers may stop paying property taxes and insurance after defaulting, increasing risk exposure for lenders. Wisconsin law and most commercial mortgages allow lenders to protect the interests in their collateral by paying taxes and insurance costs and adding those costs to the foreclosure judgment (to the extent not otherwise paid with rents from the property). Maintaining current taxes and insurance protects the investment of the lender and prevents municipal tax liens from complicating the foreclosure process. But unless the value of the property will cover these additional amounts, or unless these amounts can be paid from rents, or collected from the borrower, a lender may want to waive the deficiency and proceed to sale sooner, to try to minimize these expenses.

Best Practices for Lenders

• Review the Borrower’s Finances and Your Loan Documentation Early

Before starting the foreclosure process, see if a loan workout, forbearance agreement, or deed in lieu of foreclosure is a suitable choice. Voluntary settlements through cooperative borrower negotiation can be feasible depending on the circumstances. Workout periods and forbearance terms are also a good way to address any deficiencies in loan documents or to solidify the lender’s collateral coverage.

• Secure the Property & Install a Receiver as Needed

Where the property has been abandoned or neglected, procuring a court-appointed receiver can help maintain the value of the property and conserve income production. In addition, if the property has been abandoned by the borrower under Wisconsin law, it may be possible to shorten the redemption period down to just a matter of weeks.

• Consult Experienced Legal Experts

Due to the intricacy and nuances of Wisconsin foreclosure law, retain experienced legal professionals well-versed in the strategies and considerations to sidestep pitfalls and optimize asset recovery. By strategically leveraging Wisconsin’s statutory requirements, lenders can minimize financial exposure and maximize recovery outcomes.

If you have questions about foreclosing on commercial real estate or any other property, or if you need assistance in developing a successful foreclosure strategy, contact KMK Attorneys Samuel M. Draver at sdraver@kmksc.com or (414) 961-4810 or Samuel C. Wisotzkey at swisotzkey@kmksc.com or (414) 962-5110.