We have a commercial line of credit secured by a mortgage that has matured. We would like to renew it using a modification of mortgage. Can we provide a new note with the mortgage modification, or do we have to use a change in terms agreement instead of a new note? If we issue a new note, will it affect our lien position?

In general, there is no prohibition against issuing a new note when extending the maturity date of a commercial line of credit. However, whether issuing a new note will affect your lien position on the mortgaged collateral depends on whether the new note is intended to extinguish the original note.

Illinois courts have repeatedly held that a note “given in renewal of another note and not in payment . . . does not extinguish the original debt or change the debt except that it postpones the time for payment.” When a lien priority dispute arises, courts look to the intent of the parties to determine whether the renewal extinguished the original note. In one case, the court found that the parties did not intend for the new note to extinguish the original note because, among other things, the original mortgage was never cancelled or released, the original mortgage language provided for future additional credit advances, and the bank routinely issued new notes when increasing the balance of an existing loan. In light of those factors, the court found that the issuance of a new note constituted a renewal, not a separate transaction that extinguished the original note (which would have affected the bank’s lien priority).

While we believe that you may issue a new note to renew a commercial line of credit, if the maturity date will be the only changed term, we would recommend modifying the existing note rather than issuing a new note. If there is some reason that your bank wishes to issue a new note instead, we strongly recommend that you work with your bank counsel to carefully document that the new note is not intended to extinguish the original note.

For resources related to our guidance, please see:

State Bank of Lake Zurich v. Winnetka Bank, 614 N.E.2d 862, 867 (2d Dist. 1993) (“Indeed, the ordinary practice of lending institutions is that where a note is given in renewal of another note and not in payment, the renewal does not extinguish the original debt or change the debt except that it postpones the time for payment.”)
State Bank of Lake Zurich v. Winnetka Bank, 614 N.E.2d 862, 867 (2d Dist. 1993) (“Although a renewal note may in some cases operate as payment of and a discharge of the original note, the evidence must indicate the parties intended that the new note should serve as payment of the outstanding note. Here, the evidence indicates the parties did not intend the September note and mortgage to be a new and separate transaction which extinguished the June note. The June mortgage was never cancelled or released, and the language therein provides for additional advances at the option of the mortgagee . . . The testimony of State Bank loan officers also established that when a balance of a loan is increased, a new note and mortgage are typically executed . . . Accordingly, we find the September mortgage was a renewal or modification of the June mortgage and the June mortgage was a valid and subsisting lien on the subject property.”)
Heritage Bank of U. Park v. Bruti, 489 N.E.2d 1182, 1184 (3d Dist. 1986) (“We have no quarrel with the statement that a renewal note may operate as payment of and a discharge of the original note. However, from the aforementioned affidavit and the letters attached to the motion for summary judgment we find no evidence that plaintiff and defendants intended that the new note should serve as payment of the outstanding note.”)