Tough Times for Lenders : Financial Services Lawyer & Attorney : Winstead Law Firm : Finance, Banking, Bankruptcy

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2nd in a series of 3 postings

In a prior posting, I briefly described each concept.  The more difficult task is contrasting and comparing them.  So, here we go (with the expectation that you'll add to this listing):

Advantages of Real Property Foreclosure

Major advantages of a foreclosure include the following:

• The one overwhelming advantage of foreclosure (whether judicial or non-judicial), when compared to a deed-in-lieu of foreclosure (to be discussed in more detail below), is that a foreclosure proceeding clears or extinguishes all liens that are subordinate or inferior to the lien held by the foreclosing lender.
• Sometimes the cost to undertake a non-judicial foreclosure may be less than the costs of a deed-in-lieu transaction (in that a deed-in-lieu can include title insurance premiums, significant legal fees if the agreement is negotiated, etc. – although some of this may be mitigated by the use of a term sheet in the deed-in-lieu process).

Advantages of a Deed-in-Lieu

Deeds-in-lieu have several advantages over foreclosure proceedings as a means of obtaining some measure of repayment for a lender from a defaulting borrower:

• Accepting a deed-in-lieu allows the lender to obtain ownership of the property without the costs and delays associated with judicial and non-judicial foreclosure. (Note: in a future posting we'll discuss other agreements that allow the lender access to the property WITHOUT obtaining the title.)
• Since a deed-in-lieu is a voluntary conveyance by the borrower, the parties can agree upon the amount and related terms of any deficiency (and thus avoid a dispute as to the valuation of the property), together with a full release of any claims against lender.
• Again, since a deed-in-lieu is a voluntary conveyance by the borrower, the lender has a great deal of leverage in terms of conditioning its acceptance. The lender can condition acceptance of the deed-in-lieu upon such things as receiving a complete and accurate copy of the borrower's financial statements, tax records, leases, service contracts; construction plans and contracts, sales contracts, etc. In other words, this may be a better "turnover" of the property to the lender. (However, a "friendly" non-judicial foreclosure can achieve the same result.)
• Unlike a foreclosure, a deed-in-lieu is a private transaction that does not involve publication or court filings. Thus, with a deed-in-lieu, the borrower can avoid adverse publicity, which may also minimize the impact on property valuation.
• Accepting a deed-in-lieu of foreclosure avoids all the problems with the foreclosure process, such as the possibility of post-foreclosure attacks on the sale as a wrongful foreclosure.
• Note that accepting a deed-in-lieu structure does NOT mean that the lender's lien (or space leases) will be released or extinguished. Indeed, the lien (and space leases) may be "preserved" or "kept alive" by expressly making the deed-in-lieu subject to those interests (so that such interests will expressly continue). This will permit the lender to foreclose at a later date if, for example, there are mechanics' liens that need to be extinguished (which are subordinate to the lien). Note that use of this structure depends upon this important consideration: is the lien absolutely superior to other objectionable or problematic title matters (such as M&M liens)?