Common Workout Tools
You've reached agreement in concept with your borrower for a debt workout. The borrower will deliver the keys (and title) to the collateral, the noteholder doesn't intend to pursue recourse liability carveouts (or has agreed to forego pursuit of any claims) and you want to accomplish all of this in short order. There are several key documents and provisions you will want to work with to close your deal.
Deed in lieu of foreclosure
The quickest way to transfer title to the noteholder in a consensual workout is a deed in lieu of foreclosure. Legally, this has the effect of accomplishing what the noteholder/mortgagee could accomplish through the power of sale reserved in the mortgage or deed of trust – but without the notices, time delays and attendant costs.
If you are certain your lien interest is a first priority perfected lien interest, you are in good shape. If there is any chance you have lien priority issues, you should consider things further. Potential lien priority issues typically will involve property tax and other tax liens and mechanics and materialmen's liens (especially as to removable improvements). In that event, make certain your settlement documents include warranties and representations to the effect that there are and will be no lien claims arising based on the period of time the debtor held title. But remember, you already had a note obligation from the borrower that wasn't honored – chances are a claim for breach is going to be little consolation.
Your documents should attempt to reserve your right to proceed with a regular foreclosure, at your option. Some of these late arising priority liens can be wiped out with proper notice and foreclosure. Also, if you have the chance to do it over again, you might be able to adjust the credit on the debt in order to account for the reduced property value resulting from the priority encumbrances. Some states give the deed in lieu of foreclosure grantee this right by statute. (See, for example, Texas Property Code Section 51.006.) Bottom line, document what you can and check the law of the state where your collateral is situated in order to gauge the risk associated with taking a deed in lieu.
Indemnities
Bargain for indemnities from the borrower or interested related parties as part of the workout closing. While your practical ability to enforce these to conclusion may be limited, it is at least worth the effort to try and get these. Besides, this may be an effective way to check your due diligence. If your borrower balks, you probably have more to checkout.
Releases
If the lender is giving any concessions in the workout – and typically, it is always about concessions – the lender should be certain to obtain and document releases by the borrower, guarantors and all related parties. This should be near mandatory in any workout scenario. The last thing you want is to take your workout write down and gain control of the collateral that was underperforming only to be on the receiving end of a lawsuit. As times get tough, borrowers with their back to the wall (not to mention hungry and time-available lawyers) will go back through past deals thinking "there is gold in them there hills." Asking for the release at the workout stage will at least smoke out whether you have anything to be concerned about. If there are no claims, the borrower shouldn't mind giving the release.
