Deeds in Lieu of Foreclosure: Advantages, Disadvantages, Avoiding Pitfalls, Vital Provisions

This CLE webinar will address the advantages and disadvantages of deeds in lieu of foreclosure (DIL) and the current spike in their use due to the present distressed market. The panel will discuss key considerations for borrowers and lenders when entering into a deed in lieu agreement and provide tips for avoiding common pitfalls.

When a mortgage is in default, a DIL offers distinct and sometimes strategic advantages: the lender becomes the property owner and is allowed to take immediate control of its operation. DILs can be quickly negotiated and completed, avoiding the time and expense of foreclosure. In exchange, the borrower and guarantor, when applicable, can negotiate a release of loan obligations with less impact on the borrower's credit rating and reputation.

Despite the benefits, there are potential disadvantages for a lender. First, borrowers often challenge the deed after the fact by claiming that the deed was really a form of disguised mortgage. Second, unlike a foreclosure, a DIL does not eliminate junior property liens.

As appealing as a deed in lieu of foreclosure may be to a borrower, the borrower immediately loses possession of the property. And despite being a viable and sometimes advantageous remedy, a borrower cannot force a lender to accept a DIL and title to the property.

The typical DIL agreement will obligate the borrower to deliver a deed in lieu (along with an assignment of leases and contracts, rents and security deposits, a bill of sale, customary organizational documents, and legal opinions)—most often in exchange for a release of liability of the borrower and any guarantor or indemnitor. Ideally, for the borrower, the lender will also agree to execute and deliver at closing a covenant not to sue the borrower or any guarantors in connection with the loan, provided that the borrower complies with the DIL agreement. Lenders will also want to include appropriate release language to avoid potential liabilities associated with the property, and a non-merger clause to permit the lender to later foreclose subordinate liens if necessary.

Listen as our authoritative panel discusses the advantages, disadvantages, and common pitfalls of DIL. The panel will also provide tips on the key issues that must be addressed in a DIL agreement.