Why Litigation Searches Matter in Commercial Real Estate Lending

Pullman & Comley Real Estate attorney Daryl M. Johnson authored a BusinessWest article, “Why Litigation Searches Matter in Commercial Real Estate Lending,” which examines the importance of litigation searches in commercial real estate lending and the potential risks of overlooking lawsuits that could affect loan repayment.

In the article, Daryl stresses that early disclosure of material litigation can protect borrowers from unnecessary transaction costs, allowing potential issues to be addressed in the deal structure before significant expenses accumulate. As she notes, “Disclosed up front, the lawsuit will either get addressed in the deal structure, or everyone walks away with minimal expense.” Daryl also explains how litigation involving affiliated operating companies, guarantors and major tenants can threaten the cash flow supporting a commercial real estate loan, even when the borrower or property is not directly involved. She emphasizes the importance of looking beyond the borrower when conducting due diligence, writing, “A good search goes well beyond the name on the mortgage. It should cover guarantors, operating affiliates, key principals, and major tenants — anyone whose cash flow or credit support directly or indirectly matters to repayment.” She further discusses practical safeguards lenders can use to manage litigation risks, including reviewing insurance coverage, assessing potential impacts on customer relationships and receivables, and incorporating litigation reserves and additional reporting requirements into loan documents.

To read the full article, please visit the BusinessWest website.