Pub. 5 2017 Issue 4

Issue 4. 2017 23 DEEDS IN LIEU OF FORECLOSURE: By Todd M. Labrum, Snell & Wilmer I n considering whether to extend a loan secured by real property, a pri- mary concern for the lender is its ease and ability to enforce remedies against the real property collateral in the event that the loan becomes troubled. Typically the lender will consider loan modifications or agreed to forbearance terms, but if the parties are unable to mutually resolve a loan default, the remedies available to a real estate secured lender include foreclosure, both non-judicial and judicial, the appoint- ment of a receiver, a short sale and deed in lieu of foreclosure. This article will explore the possible advantages and risks of negotiating and accepting a deed in lieu of foreclosure. A deed in lieu of foreclosure is a recordable instrument whereby the owner of the real property encumbered by a deed of trust or mortgage conveys its interest in the property to the lender in exchange for the release of some or all obligations under the deed of trust or mortgage and other loan documents. Such conveyance, which must be entered into voluntarily by both parties, allows the lender to obtain title to the collateral property without going through the foreclosure process. Accordingly, the lender may be able to save time and costs related to a foreclosure. At the outset, a lender must determine if a deed in lieu of foreclosure makes sense for the lender by balancing the advantages and risks discussed below. Generally, a lender will most often pursue a deed in lieu of foreclosure when the borrower lacks assets other than the secured property so that pursuing a deficiency judgment (i.e. a judgment against a borrower following a foreclosure where the sale proceeds are not sufficient to repay the underlying loan in full) against the borrower is not worthwhile. Keep in mind that the availability of a post foreclosure deficiency varies by state and the foreclosure process and elections made by the lender. Careful advance planning when enforcing remedies is crucial to avoid waiving or limiting the lender’s rights. Advantages The primary motivation for a deed in lieu of foreclosure—as the names suggests—is to avoid the time and cost of the foreclosure process. In the state of Utah, the foreclosure process takes approximately 130 days from the date on which the lender provides a Notice of Default and Election to Sell to the borrower. Alternatively, a deed in lieu of foreclosure is not restricted by procedural time and notice requirements and is only limited by the time needed for the parties to negotiate and document the transfer of title. A shorter timeline is likely to translate into a decrease in costs for both parties. Lenders often fear the bad acts of a disgruntled borrower who is no longer incentivized to preserve the value and condition of the property during a lengthy foreclosure process. The shortened timeline of a deed in lieu of foreclosure allows the lender to take control of the property without the appointment and costs of a receiver and take immediate steps to repair and preserve the property, receive any associated income, maintain contracts which are necessary to operate of the property, and, ultimately, sell the property. Many lenders also find that borrowers are more cooperative in the transition of property ownership when a deed in lieu of foreclosure is used. Defaulting borrowers are spared the public court filings, required foreclosure advertisements and the accompanying stigma associated with a foreclosure appearing on their credit history. Lenders also have the opportunity to ask for helpful documentation and information relating to the property, including leasing files and service contracts, thus easing the lenders transition into ownership. Cooperative borrowers may even be willing to provide any needed assignments as part of negotiations, allowing the property to continue operations relatively uninterrupted. Lastly, and perhaps most importantly, a deed in lieu of foreclosure allows the lender to preserve its deed of trust or mortgage lien on the property if properly documented. Since a deed in lieu does not “foreclose out” any subordinate liens, the lender takes the property subject to all existing liens, whether known or unknown. Thus, many lenders will not cancel the note and deed of trust lien, but will instead give the borrower a covenant not to sue—in the event the deed is later set aside for legal or equitable reasons— and will keep the deed of trust mortgage of record and not discharge or release it until the property is sold. Utah merger law follows the intent of the parties, allowing a deed of trust or mortgage to remain in place if the parties express their intention in the deed in lieu of foreclosure to not terminate the deed of trust or mortgage. Recent case law also generally supports the ability of a lender to foreclose its deed of trust or mortgage after acceptance of a deed in lieu of foreclosure, at least where the deed contains an anti-merger provision. n Advantages and Considerations for Secured Lenders