Commercial Mortgage Default Refinance: A Practical Recovery Plan
Commercial mortgage arrears, default notices and enforcement deadlines require a coordinated response. A replacement lender will assess the verified payout, property, security position, borrower circumstances, required net funds and a credible exit.
Commercial and business-purpose finance only. Finance is subject to assessment, valuation, lender criteria, documentation, acceptable security and a credible exit. Obtain independent legal, tax, accounting, insolvency and valuation advice.
Default refinance is not simply a larger loan used to clear arrears. The proposal must explain why the default occurred, what has changed, how much is required at settlement and how the replacement facility will be repaid without repeating the same problem.
Arrears, default and enforcement are not the same stage
Payment arrears
A scheduled payment or another amount is overdue, but the lender’s formal response depends on the facility and circumstances.
Contractual default
A payment, covenant, reporting, valuation, insurance or other obligation under the facility may have been breached.
Formal notice or demand
The borrower may face a specified deadline, requested remedy or accelerated payout under the finance documents.
Enforcement activity
Legal steps, possession, controller or receiver issues may materially change the available time, costs and settlement process.
The facility agreement, mortgage, guarantee and correspondence determine the legal position. Borrowers should obtain advice from a lawyer experienced in commercial finance and enforcement rather than relying on a general description of the process.
What should happen first?
- send all notices and finance documents to the borrower’s lawyer;
- confirm the next contractual or enforcement deadline;
- request a current written payout and transaction history;
- identify every mortgage, caveat and security interest;
- confirm property insurance, rates, land tax and lease status;
- prepare a current statement of business and company debts;
- assess whether the business can pay debts as they fall due; and
- open a documented discussion with the existing lender.
Business.gov.au recommends assessing the financial position, seeking advice and speaking to creditors early. For a company facing possible insolvency, directors should also obtain qualified insolvency advice promptly.
Reconcile the full default payout and net funds
A lender cannot assess the refinance from the scheduled principal alone. The payout may change daily and should be reconciled against the proposed settlement date.
- principal and capitalised amounts;
- ordinary and default interest;
- arrears, dishonour or administration charges;
- legal and enforcement costs;
- valuation, receiver or agent costs where applicable;
- discharge and settlement costs;
- other secured creditors or caveats;
- property rates, taxes and statutory charges; and
- new facility costs and retained interest.
Facility limit: the maximum approved amount.
Less settlement deductions: current payout, interest, establishment, legal, valuation and discharge costs.
Equals net usable funds: the amount actually available for approved business purposes after settlement.
If the loan must also fund working capital, creditor payments or project costs, include a separate sources-and-uses schedule. The new facility needs to solve the complete approved requirement, not just the headline payout.
What will a default-refinance lender investigate?
Cause of default
One-off timing event, failed refinance, construction delay, vacancy, trading pressure, tax debt or a structural cash-flow problem.
Property and title
Current value, use, condition, occupancy, marketability, priority and all interests affecting settlement.
Borrower response
Disclosure, records, lender communication, professional advice and actions taken to prevent the problem recurring.
Exit evidence
Bank refinance requirements, sale evidence, development milestones, business cash flow and fallback repayment pathway.
The lender may require a new valuation because distress, vacancy, incomplete work or market change can affect both value and sale period. The assessment normally considers the lower-value and delayed-exit cases, not only the borrower’s preferred outcome.
See what to do before a private loan reaches maturity and the broader commercial mortgage distress guide.
How may a commercial mortgage default be refinanced?
- Replacement first mortgage: a new lender pays out the defaulted first mortgage and takes first-ranking property security.
- Additional-property support: another acceptable property strengthens the security position or supplies required equity.
- Second mortgage: a defined arrears or business requirement may be funded behind an existing first lender, subject to consent, equity and priority.
- Sale bridge: a short-term facility allows an orderly sale to complete where evidence supports the expected timing and proceeds.
- Completion finance: funds clear existing debt and complete an incomplete project so the property can reach an executable sale or refinance exit.
- Development exit facility: construction debt is refinanced after completion while remaining stock is sold or longer-term finance is arranged.
The suitable structure depends on the legal stage, property value, total payout, borrower position, approved use, available time and exit. Approval and settlement are never guaranteed.
How should the new exit address the original default?
Explain the original failure
State why the scheduled refinance, sale, completion or cash-flow plan did not occur.
Show what is different now
Document completed works, new contracts, reduced debt, improved trading, an active sale or confirmed refinance conditions.
Model the full exit debt
Include interest, costs, holding expenses and a reasonable timing buffer.
Test the downside
Use a lower sale value, slower timing or delayed refinance to determine whether the plan remains credible.
Document a fallback
Identify an alternate refinance, additional equity or orderly sale pathway.
A plan that simply replaces one overdue short-term facility with another, without a supported repayment event, is unlikely to resolve the underlying risk.
Documents for a commercial default refinance
- facility agreement, mortgage, guarantees and variations;
- arrears, breach, default, demand and enforcement notices;
- current written payout and transaction history;
- property title, leases, insurance and valuation;
- details of other mortgages, caveats and secured claims;
- rates, land tax and statutory-charge position;
- company, trust, director and guarantor records;
- business financials, management accounts and cash-flow forecast;
- tax and material creditor position;
- development budget and cost-to-complete evidence where relevant;
- sale or bank-refinance evidence supporting the exit; and
- complete settlement sources and uses.
Consistency matters. The payout, valuation, requested loan, costs and exit debt should reconcile across the application, lender submission and legal documents.
An investment-property mortgage enters default after a delayed sale
Situation: A company-owned commercial investment property has a defaulted mortgage after the expected sale campaign took longer than planned.
Finance requirement: Refinance the verified secured payout and approved settlement costs before enforcement advances.
Potential structure: A replacement short-term first mortgage, subject to the current valuation, title, leases, borrower, notices, legal position and lender assessment.
Exit: An orderly sale supported by an active agency campaign and conservative net proceeds, with longer-term refinance as a secondary pathway.
This is a hypothetical illustration only, not a completed transaction or a promise that enforcement will pause or finance will be approved or settled.
What can prevent a workable refinance?
- approaching lenders without the formal notices;
- understating interest, legal or enforcement costs;
- using an outdated payout or valuation;
- failing to disclose other secured creditors;
- ignoring company solvency and directors’ duties;
- requesting working capital without a budget;
- relying on an undocumented lender extension;
- repeating the same unsupported exit; or
- leaving valuation and legal work until the deadline.
Commercial mortgage default refinance FAQs
Can a commercial mortgage in default be refinanced?
Potentially. The replacement lender will assess the notices, payout, property, security priority, borrower, purpose, total exposure, timing and repayment exit.
Can arrears and legal costs be included?
Potentially, where the amounts are verified and the complete transaction meets lender criteria. These costs reduce available equity and net funds.
Will a refinance application stop enforcement?
No. The current lender’s legal rights continue unless it formally agrees otherwise. Borrowers should obtain legal advice and communicate with the lender promptly.
Can another property support the refinance?
Potentially. Cross-security or an additional mortgage may improve the structure, subject to ownership, valuation, existing debt, consent and lender assessment.
Can a property sale be the exit?
Potentially. The lender will examine the campaign, price evidence, expected net proceeds, sale period, settlement timing and a fallback if the sale is delayed.
What if a receiver has been appointed?
The legal and practical position changes materially. Obtain urgent advice from a lawyer and qualified insolvency practitioner before pursuing any refinance proposal.
Official Australian references
Is a commercial mortgage in arrears or default?
Basic Finance Loans can review the notices, payout, property, security position, required funds, deadline and repayment exit to identify potential commercial refinance structures.
Commercial and business-purpose finance only. Information is general and does not constitute legal, tax, accounting, insolvency, valuation or financial advice. Finance is subject to assessment, valuation, lender criteria, documentation, acceptable security and exit.