Hey Seller, Freeze!
First, Some Background
When you sell your apartment, all outstanding loans that are secured by liens against the apartment (a mortgage lien with a condo and a UCC lien against the shares with a co-op) will have to be paid in full at closing and the liens terminated. That requires the seller’s attorney to obtain “pay-off” letters from the bank or banks that are owed money by the seller.
With condo transactions, the seller’s attorney presents the pay-off letter he or she has obtained to the title closer together with payment of the balance of the mortgage loan that is outstanding. The title closer then calls the bank’s pay-off department from the closing and verifies the outstanding balance. Assuming the pay-off check matches the outstanding balance, the title closer will “omit” the mortgage lien from the title report and will forward the payment to the bank immediately after the closing. When the bank gets the payment, the pay-off department will forward a “mortgage satisfaction to the title company, that will then be recorded in the county where the condo is located, to officially release the lien as a matter of record.
With co-ops, things are a little different. A representative of the seller's bank will actually show up at the closing with the seller’s stock certificate and proprietary lease (given to the bank as security when the seller originally purchased the apartment and borrowed money from the bank). When the pay-off check is delivered to the bank’s attorney, the stock and lease are delivered to the Managing Agent for cancellation and issuance of a new stock certificate and lease to the purchaser. The bank's attorney will also deliver a UCC “termination statement” terminating the bank’s security lien. This piece of paper will be recorded in the county where the co-op is located by the attorney for the purchaser’s bank or by the purchaser’s attorney in an all cash transaction, to terminate the lien of the seller’s bank against the shares.
The Line of Credit
In addition to the primary loan which a purchaser may obtain to acquire the apartment, sometimes an owner may also obtain a home equity line of credit (known as a “HELOC” in the trade). The bank will file another UCC lien to give notice of the loan and the borrower will enter into a credit agreement with the bank that allows the borrower to “drawn down” against the loan when needed and pay it back when possible. It is a revolving credit loan in which the borrower can keep borrowing against the line, to the extent the entire line of credit is not used, or the amount of the line is not reduced or terminated.
When there is an outstanding line of credit, there is one more step that the seller has to undertake in order satisfy the obligation to deliver title free of all liens and encumbrances.
Freezing the Line
Besides delivering pay-off letters and payments in full of the seller’s loans, with an outstanding line of credit, the seller must request that the bank “freeze” the line of credit so that the seller is not permitted to take any further advances against the line. To freeze the account, the seller is usually required to put the freeze request to the bank in writing in advance of the closing. Once the bank gets the request, the bank will issue a letter indicating that the line has been frozen. If the seller fails to obtain a “freeze letter” from the bank, the closing may have to be adjourned until the freeze letter is obtained. The purchaser’s attorney and the purchaser’s title company (with a condo purchase), should not go forward with the closing if the seller has not terminated his or her right to take advances against the line of credit. Although it is unlikely that a seller will continue to draw down on a line of credit after the apartment has been sold and the line paid off, without written verification from the seller’s bank that the line of credit has been frozen, the closing may not be completed.
Residential Reality: Freezing the Line of Credit is a Detail, but an Important One
In most cases, the seller’s attorney nudges the seller sufficiently and the seller’s line is frozen and a freeze letter is delivered at closing. In order to insure a closing with lots of smiling faces, the lawyers need to make sure that this technical detail is handled.