IBA Compliance Connection

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We have commercial mortgages on rental properties belonging to an LLC borrower. The LLC is creating two new subsidiary LLCs and transferring title to the properties to these subsidiaries. The indebtedness will stay with the parent LLC, but the deeds to the properties will reflect that the two new child LLCs have title. Will this affect our mortgages on the properties? We want to avoid having to refinance these mortgages.

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No, we do not believe that the transfer of title to these subsidiaries will affect your right to collect on your promissory note or foreclose your mortgages on the rental properties.

We believe the terms of your promissory notes will continue to be enforceable against the parent LLC after the transfer of title, as you are not releasing the parent LLC from liability under the loans or allowing the child LLCs to assume the loans.

We also believe that your mortgages will remain valid. The Illinois Code of Civil Procedure provides that “from the time a mortgage is recorded it shall be a lien upon the real estate that is the subject of the mortgage” and the Illinois Conveyances Act states that “mortgages . . . shall take effect and be in force from and after the time of filing the same for record . . . as to all creditors and subsequent purchasers, without notice.” Consequently, provided that you properly established and recorded your mortgages on the rental properties, we believe they would remain valid and enforceable, even after title to the mortgaged properties changes hands.

We recommend reviewing the terms of your mortgages to determine whether they contain due-on-transfer clauses that would allow you to accelerate the loan balances after sale or transfer of title to the mortgaged properties. If your mortgages contain such a clause, we recommend consulting with bank counsel to determine whether acceleration is warranted in this situation.

For resources related to our guidance, please see:

  • Illinois Code of Civil Procedure, 735 ILCS 5/15-1301 (“Except as provided in Section 15-1302, from the time a mortgage is recorded it shall be a lien upon the real estate that is the subject of the mortgage for all monies advanced or applied or other obligations secured in accordance with the terms of the mortgage or as authorized by law, including the amounts specified in a judgment of foreclosure in accordance with subsection (d) of Section 15-1603.”)
  • Illinois Conveyances Act, 765 ILCS 5/30 (“All deeds, mortgages and other instruments of writing which are authorized to be recorded, shall take effect and be in force from and after the time of filing the same for record, and not before, as to all creditors and subsequent purchasers, without notice; and all such deeds and title papers shall be adjudged void as to all such creditors and subsequent purchasers, without notice, until the same shall be filed for record.”)