Foreclosure Alternatives

By David Meyer | May 04, 2009
We have all read about the increased level of foreclosure activity among ethanol producers across the country. However, foreclosure is not the only option for producers who have fallen on hard times. One of the less-frequently discussed alternatives consists of transactions wherein borrowers voluntarily transfer title to their property to their lenders by deed.

These voluntary conveyances are commonly referred to as "deed in lieu" transactions.

Benefits of a Deed in Lieu Agreement
When a borrower defaults on its obligations to a lender, the lender often ends up foreclosing on the property that secures the loan. Because the foreclosure process can be time consuming and expensive, it may make sense for a lender to accept a deed from the borrower in lieu of foreclosure as satisfaction of the debt. If a lender is willing to accept a deed in lieu of foreclosure, the lender takes title to the property immediately and eliminates the redemption period. By gaining immediate control of the property, the lender can direct its operation, obtain all of its income (if any) and put the property on the market much more quickly. If tenants are operating businesses out of the property, an orderly transfer of title may maintain the value of those tenancies and the businesses. Another advantage to the lender is avoiding the risks associated with litigation.

There are a number of reasons why a borrower may be willing to convey title by deed in lieu of foreclosure including to avoid the cost and stress involved in a foreclosure action or to avoid the negative publicity that may be associated with foreclosure. One of the primary reasons a borrower may give a deed, however, is to avoid a personal judgment against the borrower. In exchange for the deed, a lender will generally agree to release the borrower from any further obligations under the mortgage or deed of trust and other loan documents. Similarly, if the loan was guaranteed, a lender may agree to release the guarantor from any further liability under his or her guaranty.

Typical Provisions in a Deed in Lieu Agreement
The actual contract that is executed by the parties is referred to by many different names, including a Deed in Lieu Agreement, an Agreement in Lieu of Foreclosure, or a Settlement Agreement. It is important to note that there is no standard form of Deed in Lieu Agreement. The substance of the agreement will depend on the specific type of property being conveyed and the relative bargaining strength of each of the parties.

Lenders generally approach a deed in lieu transaction much like any other purchaser of real estate, including conducting the appropriate due diligence, which may include, for example, title review, environmental testing, surveys, and confirmation of compliance with local zoning ordinances. If the property is improved, the lender may require that the borrower convey not only the real estate, but also any equipment, fixtures and other personal property that is used in the operation or maintenance of the real property. Similarly, if any portion of the property is leased, a lender may require that the leases be assigned to the lender at closing on the deed in lieu transaction.

While it may initially seem that a deed in lieu transaction is a relatively simple process for a willing borrower and lender to transfer title to property to avoid a foreclosure, there are risks associated with the transaction that must be carefully assessed by both parties. Also, because there is no standard form of agreement, it is important for borrowers and lenders to consult with their attorneys and other advisors when considering entering a Deed in Lieu Agreement.

David Meyer is a partner in Lindquist & Vennum's Real Estate practice. He can be reached at dameyer@lindquist.com or (612) 371-3531.