Why Take a Deed in Lieu of Foreclosure? Why Not?

by Baker Donelson

So you're headed for receivership and foreclosure, when the borrower rep or your counsel asks, "What about a deed in lieu?" "I don't know," you think. "Getting a receiver appointed and foreclosing is what I'm most familiar with." Fair enough. But the benefits of a DIL might surprise you. You just have to put a good agreement in place that protects you.

Advantages of a DIL

An obvious advantage of a DIL in a judicial foreclosure state is avoiding the time and expense of drawn-out foreclosure procedures. But even in a nonjudicial state, a DIL may be the right call in the right situation. In Alabama, for instance, taking a DIL can avoid the dreaded one-year statutory right of redemption that otherwise arises from foreclosure. But beyond redemption issues, lenders and servicers often need to complete third party reports and may have legitimate concerns about misapplication of rents. Because a DIL is consensual, there is room to get what you want just by asking, instead of resorting to litigation.

Treat it like a property sale from borrower to holder

The important thing to remember about a DIL is that it is like a property sale - as if the holder is "buying" the collateral from the borrower in full or partial satisfaction of the debt. Thus, the first step in any DIL transaction is ordering title insurance. The benefits of title insurance go beyond the owner's policy itself. In addition to the standard title affidavits, the title company will require the borrower to provide an affidavit and indemnity attesting that the borrower is not completing the DIL under duress, that the transaction is fully authorized, and that the value of the property is less than the amount of the debt, among (many) other things. It's a built-in defense to rescinding the transaction.

Like any property sale, you also need a sale agreement - in this case, a Deed in Lieu of Foreclosure and Settlement Agreement - with all the terms you'd expect in a sale agreement: closing date, closing conditions, an inspection period (and just like that borrower has consented to give you access for an appraisal, phase I, phase II, PCA, and survey, all at once and within a specified timeframe), reps and warranties about title and authorization, and a catch-all covenant requiring "any documents or instruments required by the title company." The Agreement will also include typical closing documents: not just the deed, but also a bill of sale for the personal property and an assignment of leases and contracts, complete with a form rent direction letter borrower must send to the tenants.

Protect yourself with settlement terms

But a DIL Agreement is also a settlement agreement; after all, the holder is agreeing to forgive the debt. Ending the borrower/lender relationship calls for additional terms:

• a full release of claims against holder and its predecessors, servicers and representatives;

• a provision that the environmental indemnity survives closing;

• an acknowledgment that the holder can file a 1099 if required by applicable law;

• an accounting of rents and security deposits

• a "settlement payment" in the event borrower is holding or has diverted rents - this last point gives you something to negotiate and can sweeten the deal (for both sides).

Like any settlement agreement, a DIL allows the holder flexibility to protect its interests while still giving the borrower (and carve-out guarantors) incentives to do a deal.

As always, a DIL, like any remedy, should be appropriate in the given circumstances. If a title search reveals junior liens, a DIL might not be the way to go when you can extinguish them by foreclosure. If there is a tenant-in-common structure in place, it might not be feasible to get every TIC to sign a deed. But in the right circumstances, a DIL can be a quick and easy way to take title in a smooth transition while settling potential claims with the borrower, all without litigation.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Baker Donelson | Attorney Advertising

Written by:

Baker Donelson

Baker Donelson on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.