Deeds in Lieu of Foreclosure of Commercial Mortgages: Borrower and Lender Concerns

Title and Other Due Diligence, Nonrecourse Carveouts, Competing Lenders, Bankruptcy Issues

Recording of a 90-minute premium CLE video webinar with Q&A


Conducted on Tuesday, April 6, 2021

Recorded event now available

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Course Materials

This CLE course will examine the issues presented when a lender takes a deed in lieu of foreclosure on commercial real estate. The panel will discuss the advantages of taking a deed in lieu, title concerns, addressing existing liens and other borrower financings, and nonrecourse carve-outs and other negotiating points to consider.

Description

When a commercial mortgage goes into default, a deed in lieu of foreclosure offers distinct advantages: the lender becomes the owner of the property, allowing the lender to take immediate control of its operation, and the transaction can be quickly negotiated and completed, avoiding the time and expense of foreclosure. In exchange, the borrower and guarantor can negotiate a release of obligations under the loan. Still, there are pitfalls that both parties should consider.

Before agreeing to take a deed-in-lieu, a lender must conduct due diligence to identify the risks and potential liabilities associated with the property, including environmental issues, delinquent taxes, judgments, and other liens and encumbrances. This should include a thorough analysis of any mezzanine loans and related intercreditor agreements. A non-merger endorsement should be obtained from the title company to ensure that the deed and mortgage remain separate, so that the lender may later foreclose out subordinate liens if necessary.

The deed in lieu agreement should describe the consideration for its execution and contain an acknowledgment that the property's value is less than the outstanding indebtedness. If the property's value exceeds the debt, the transaction may be set aside in bankruptcy. The most heavily negotiated points will likely involve reps and warranties and any nonrecourse or other loan obligations which will remain after conveyance.

Listen as our authoritative panel discusses the pros and cons of deeds in lieu and the key issues which must be addressed in a deed in lieu agreement.

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Outline

  1. Advantages of taking a deed in lieu of foreclosure
  2. Lender concerns
    1. Due diligence: assessing environmental issues, delinquent taxes, judgments, and other liens and encumbrances
    2. Subordinate liens are not wiped out: non-merger and other title endorsements
    3. Mezzanine and junior lenders: intercreditor agreement(s)
  3. Borrower concerns
    1. Continuing liability after the conveyance
    2. Liability to other lenders and creditors
  4. Key terms of a deed in lieu agreement
  5. Bankruptcy issues
  6. Tax issues

Benefits

The panel will review these and other critical issues:

  • What is the primary advantage to the lender of taking a deed in lieu of foreclosure?
  • How can a lender retain the right to foreclose out junior lienholders after taking a deed in lieu?
  • What are the key provisions that should be included in a deed in lieu agreement?
  • Why is property valuation an important aspect of a deed in lieu transaction?
  • How might the tax treatment of a deed in lieu transaction vary from a foreclosure?

Faculty

Bergman, Jason
Jason C. Bergman

Vice President & Senior Underwriting Counsel
Benchmark Title Agency

Mr. Bergman has nearly two decades of experience in the real estate/title insurance industry. Prior to joining...  |  Read More

Kakstys, Clint
Clint Kakstys

Member
Sills Cummis & Gross

Mr. Kakstys’ practice focuses on the acquisition, disposition and financing of commercial properties. He...  |  Read More

Viscount, Michael
Michael Viscount

Partner
Fox Rothschild

Mr. Viscount is a commercial lawyer whose practice focuses primarily on the representation of public and private...  |  Read More

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