Given the increased likelihood for challenges to title, deeds-in-lieu of foreclosure are deemed to be high-risk transactions for the title industry. Most challenges (either actual or potential) emanate from claims of improper entity authority (vide infra), bankruptcy, creditor’s rights, and off-record rights and obligations. While not all challenges are directly or initially the responsibility of the title company, any effort to set aside the deed-in-lieu could lead to a claim under the title insurance policy.
To manage and reduce the inherent risks, and to afford sufficient lead time to allow proper underwriting, it is highly advisable to connect with your title company as early as possible. Although specific to New York, the following will generally apply to many jurisdictions and is intended to make your next deed-in-lieu transaction easier.
To underwrite a deed-in-lieu transaction, a title insurance underwriter will, at a minimum, require the following:
Confirmation that the property is “under water” and that the debt exceeds the fair market value of the property. This is best supported by a current appraisal of the property and a current statement of the amount of the debt. If the debt is less than the value of the property, a court could deem the mortgage to be an equitable mortgage, which could lead to the deed-in-lieu being set aside. This, of course, would be untenable for the title insurance company and the parties to the transaction.
A deed-in-lieu agreement. This must memorialize the genesis of the mortgage, default history, and the collective agreement to grant and accept a deed-in-lieu and under what terms. The agreement must contain statements/acknowledgements that the:
- Conveyance is an absolute conveyance by the borrower/grantor;
- Borrower/grantor is voluntarily entering into the deed-in-lieu agreement;
- Borrower/grantor waives any rights to control, use and/or develop the property (i.e., they are walking away with no further or continuing interest);
- Borrower/grantor waives any rights of redemption;
- Borrower/grantor will not be entitled to injunctive relief and will be limited only to obtaining damages upon a breach of the deed-in-lieu agreement; and that
- There are no options to purchase, rights of first refusal, or any right to obtain proceeds upon the resale of the property.
A standard title affidavit and a deed-in-lieu affidavit signed by the borrower/grantor. Statements that must appear in the deed-in-lieu affidavit are that the:
- Conveyance is not intended to be a mortgage or security of any kind;
- Deed-in-lieu is not being given as a preference against any other creditors of the borrower/grantor and that there are no creditors whose rights would be prejudiced by the deed-in-lieu;
- Borrower/grantor is not obligated upon any bond or other mortgage whereby any lien has been created or exists against the property; and
- Consideration for the transfer is the full cancellation of all debts, obligations, costs and charges secured by the mortgage(s) against the property.
If the borrower/grantor is an entity (e.g., LLC), organizational documents will, of course, be required. While this, in and of itself, is not unusual, the requirement relating to the consent of the entity is in that it will need to be signed by every member of the entity. Even if the underlying entity documents allow for a manager to bind the entity, or allows for less than unanimous consent, since the borrower/owner is relinquishing all rights, title and interest in the property, unanimous consent of all members is necessary. Assertions of lack of consent and authority are common and thus a prime example of why deeds-in-lie are high-risk transactions for the title industry.
Acknowledgement that the mortgage that is the subject of the deed-in-lieu cannot be further transacted. The mortgage can be used to foreclose out junior liens, but no further financing, assumptions, etc., are permitted, and the mortgage itself would be an exception in the title insurance policy as it is no longer deemed a viable lien (save for the ability to foreclose junior liens).
Non-merger language. If the existing mortgage is not satisfied as part of closing of the deed-in-lieu conveyance, the deed must include language that the mortgage is not merging into the fee.