4.12 Deeds In Lieu Of Foreclosure

4.12.1

In General

A deed in lieu of foreclosure may be defined as a deed given by the owner of mortgaged property to the holder of the mortgage where the mortgage is in default and foreclosure is a possibility: A deed given and accepted as an alternative to foreclosure. A deed in lieu of foreclosure does not cut off liens or other matters inferior to the deed of trust lien. (See Flag-Redfern Oil Co. v. Humble Exploration Co. 744 S.W. 2d6, Tex. 1987)

Most courts have long recognized that the execution of a deed in lieu of foreclosure in a transaction after the original mortgage transaction is a legitimate alternative to foreclosure proceedings. However, deeds in lieu of foreclosure are frequently subjected to judicial attack by their grantors and their grantors' creditors. Courts fully review and scrutinize deeds in lieu of foreclosure for elements of voidability.

The main grounds for judicial attacks in connection with deeds in lieu of foreclosure include the following:

  • That the parties intended the deed to be given as additional security for an existing debt and that the deed was not an absolute conveyance.

  • That the deed is either a preferential or fraudulent transaction within the purview of the provisions of the federal Bankruptcy Act or any other related state law.

  • That the deed is a device to cut off the grantor's right of redemption.

  • The unfairness of the consideration; that is, the ratio between the amount of the indebtedness and the value of the property.

  • Coercion, fraud, oppression, duress, and undue influence.

  • That the deed is not subsequent to the execution of the mortgage but contemporaneous with it.

  • That the mortgagor was insolvent at the time of the execution of the deed.

An estoppel affidavit (executed and acknowledged by the grantor, attesting to the fairness of the transaction, the value of the property, the consideration paid, or other factors showing an intention to make a genuine transfer,) or a recital (inserted directly in the deed between the mortgagor and the mortgagee in order to estop the mortgagor,) are supporting documents used in forestalling attacks on these transactions.

4.12.2

Checklist In Regard To Deeds In lieu Of Foreclosure

The following is a checklist of items to be considered in regard to a deed in lieu of foreclosure.

Some of the findings may require special analysis or additional consideration.

Does the deed or anything in the chain of title indicate that it is being given as an additional security for, rather than in satisfaction of the indebtedness?

Has the deed been given for an adequate consideration?

Is there any knowledge or possibility that either duress or undue influence might have intervened?

Has the deed been properly executed?

Has the deed of trust been released of record?

Has the owner surrendered possession of the property? If not, under what title or capacity is the owner occupying the property?

Does the deed or any other instrument state that the owner is to remain in possession?

Does the deed contain an option to repurchase the property?

Is there any arrangement by which the mortgagor has the right or the obligation to take back the title?

Have any pending foreclosure proceedings been dismissed?

Has the Company been furnished with either the agreement or the estoppel affidavit executed by the parties in relation to the deed in lieu of foreclosure?

Is the grantor insolvent at the date of the execution of the deed?

4.12.3

Owner's Policy To Be Issued In Favor Of A Grantee In A Deed In Lieu Of Foreclosure

Amount of the Policy

The amount of the policy must not exceed the amount of the principal indebtedness due, plus interest, taxes, and expenses. This amount cannot be increased until the title has been conveyed to a bona fide purchaser for value from the Grantee in the Deed in Lieu.

Endorsement of an Existing Mortgage Policy

It is not possible to endorse an existing mortgagee's policy in order to reflect a transfer of the property in favor of the insured mortgagee.

Omission of Inferior Liens or Encumbrances

It is not permissible to omit the showing of any lien or encumbrance on the basis of either their inferiority or their possible elimination by a proper foreclosure action.

Title of the Deed of Trust

The lender's title, as now owner of the fee simple, becomes subject to all the matters affecting the title to the property including unrecorded deeds of trust or other unrecorded interests in the land. Only a bona fide purchaser for value is protected against such unrecorded matters.

4.12.4

Not Releasing the Deed of Trust

It is of the utmost importance that, as part of the transaction, the mortgage debt or personal liability be released. If the mortgage note or personal liability is not released, the courts may treat the new deed as merely a deed given as security for a debt; in other words, another deed of trust, or they may hold the deed to be invalid.

However, in some transfers of commercial property, mortgagees who contemplate taking a deed in lieu of foreclosure and reselling the property immediately, wish to preserve the priority position of the deed of trust against subsequently filed liens or encumbrances, and to this effect, they ask the Company to waive its requirements in relation to the release or cancellation of the deed of trust and note.

In these situations, it would be permissible to accommodate any mortgagee's request upon compliance with the following additional requirements:

  • The deed must contain an appropriate recital stating that there is no intention to merge the interest of the mortgagee under the mortgage.

  • A written agreement between the parties, providing that the consideration for the transfer of the property is the release of the personal liability of the grantor and of any guarantor, is to be filed for record.

  • The deed of trust note must be properly marked in order to reflect the release of the personal liability.

NOTE: The above requirements are in addition to any other requirements that need to be made in connection with deeds-in-lieu of foreclosure transactions.

4.12.5

Estoppel Certificates

An estoppel certificate also known as estoppel affidavit, certificate of no defense, or declaration of no setoff is a written certificate or declaration executed by a lender, a tenant, or any other party, with the intention that a third party rely upon the statement setting forth certain facts pertaining to the declarant's relationship to other parties or to the real estate in question.

These certificates or declarations may serve different purposes and adopt a wide variety of forms. They are extensively used in the different phases of title insurance.

4.12.6

Estoppel Certificate Form Of Individual Giving Deed In Lieu of Foreclosure

STATE OF _________________)
COUNTY OF _______________)

__________________ and __________________, husband and wife, being first duly sworn, each for himself and herself, deposes and says: That they are the identical parties who made, executed, and delivered that certain deed to _______________________, dated the _____ day of ________________, 19 ________ conveying the following described property, to-wit:

(PROPERTY DESCRIPTION)

That affiants now are, and at all times herein mentioned, were husband and wife;

That the aforesaid deed was intended to be and was an absolute conveyance of the title to said premises to the grantee named therein, and was not and is not now intended as a mortgage, trust conveyance, or security of any kind; that it was the intention of affiants as grantors in said deed to convey, and by said deed these affiants did convey to the grantee therein all their right, title, and interest absolutely in and to said premises; that possession of said premises has been surrendered to the grantee;

That in the execution and delivery of said deed affiants were not acting under any misapprehension as to the effect thereof, and acted freely and voluntarily and were not acting under coercion or duress;

That aforesaid deed was not given as a preference against any other creditors of the deponents or either of them; that at the time it was given there was no other person or persons, firms or corporations, other than the grantee therein named interested, either directly or indirectly in said premises; that these deponents are solvent and have no other creditors whose rights would be prejudiced by such conveyance, and that deponents are not obligated upon any bond or other mortgage whereby any lien has been created or exists against the premises described in said deed.

That the consideration for said deed was and is payment to affiants of the sum of $ _______________ by grantee and the full cancellation of all debts, obligations, costs, and charges secured by that certain deed of trust heretofore existing on said property executed by _____________________, mortgagor, to ____________________, as mortgagee, dated the _____ day of ___________________, 19_____, and recorded in Book ________ of Official Records, page ______, __________ County, State of ________________, and the release of record of said deed of trust; and that at the time of making said deed affiants believed and now believe that the aforesaid consideration therefor represents the fair market value of the property so deeded;

This affidavit is made for the protection and benefit of the grantee in said deed, his successors and assigns, and all other parties hereafter dealing with or who may acquire an interest in the property herein described.

That affiants, and each of them, will testify, declare, depose, or certify before any competent tribunal, officer, or person, in any case now pending or which may hereafter be instituted, to the truth of the particular facts hereinabove set forth.

____________________
____________________
____________________

(Add appropriate language for recordable affidavit in the specific state.)

4.12.7

Estoppel Certificate Form Of Corporation Giving Deed In Lieu Of Foreclosure

STATE ___________________)
COUNTY _________________)

________________________ and _________________________, being first duly sworn, each for himself/herself deposes and says:

That they are the _______________ and _______________ respectively, of __________________________, the corporation which made, executed, and delivered that certain deed to ________________________, dated the _____ day of ______________, 19_____, conveying the following described property, to-wit:

(PROPERTY DESCRIPTION)

That they make this affidavit for and on behalf of said corporation pursuant to a resolution of its Board of Directors;

That the aforesaid deed was intended to be and was an absolute conveyance of the title to said premises to the grantee names therein, and was not and is not now intended as a mortgage, trust conveyance, or security of any kind; that it was the intention of said corporation as grantor in said deed and by said deed said corporation did convey to the grantee therein all of its right, title, and interest absolutely in and to said premises; that possession of said premises has been surrendered to the grantee;

That aforesaid deed was not given as a preference against any other creditors of the deponent; that at the time it was given, there was no other person or persons, firms or corporations, other than the grantee therein named interested, either directly or indirectly in said premises; that the deponent is solvent and has no other creditors whose rights would be prejudiced by such conveyance, and that deponent is not obligated upon any bond or other mortgage whereby any lien has been created or exists against the premises described in said deed;

That in the execution and delivery of said deed said corporation was not acting under any misapprehension as to the effects thereof, and acted freely and voluntarily, and was not acting under coercion or duress; that the consideration for said deed was and is payment to said corporations of the sum of $ _______________ by grantee and the full cancellation of all debts, obligations, costs, and charges secured by that certain deed of trust heretofore existing on said property, executed by _______________________ to _______________________, dated the _____ day of ____________, 19_____, and recorded in Book _________ of Official Records, page _____, _________________, County, ____________________ and the release of record of said deed of trust; that at the time of making said deed said corporation believed, and affiants as officers of said corporation, believed, and now believe that the aforesaid consideration therefor represents the fair market value of the property so deeded;

This affidavit and estoppel certificate is made for the protection and benefit of the grantee in said deed, his successors and assigns, and all may acquire an interest in the property herein described.

That affiants, and each of them, will testify, declare, depose, or certify before any competent tribunal, officer, or person, in any case now pending or which may hereafter be instituted to the truth of the particular facts hereinabove set forth;

That said affiants have executed this affidavit and estoppel certificate as individuals, and also for and on behalf of said corporation pursuant to authority of the Board of Directors of said corporation.

_______________________________
_______________________________
________________________________ COMPANY
By _____________________________
President

By _____________________________
Secretary

(Add appropriate language for recordable affidavit in the specific state.)