A loan secured by a mortgage that goes into default often provides the lender with various options to pursue repayment. One option involves foreclosure by the lender in a public auction and the property sold to the highest bidder. To control costs or to prevent a deficiency, lenders and borrowers may agree to a deed in lieu of foreclosure. A deed in lieu may be an appropriate remedy for residential or commercial property for owners and lenders in Middlesex County, Essex County or throughout the Commonwealth of Massachusetts. A deed in lieu of foreclosure occurs when a property owner is willing to transfer the property and deliver a deed to the lender and the lender is willing to accept the deed instead of pursuing a foreclosure.
Although the process results in delivery of a deed from the owner to the lender, instead of the formality of foreclosure, in some circumstances a deed in lieu is still construed to be a “foreclosure” to the extent it determines the rights and obligations of interested parties. This is particularly relevant in the area of condominium law. Under M.G.L. c. 183A, § 22, “[i]n the event of a foreclosure upon a condominium development, the lender taking over the project shall succeed to any obligations the developer has with the unit owners and to the tenants, except that the developers shall remain liable for any misrepresentation already made and for warranties on work done prior to the transfer.”
A seminal case in Massachusetts regarding the applicability of section 22 to a lender that accepts a deed in lieu is Moloney v. Boston Five Cents Savings Bank, FSB, 422 Mass. 431 (1996). In Moloney, the lender acquired a deed in lieu of foreclosure from a developer on a loan secured by a condominium development. The lender asserted that it was not responsible for the developer’s obligations to the unit owners under section 22 because the term “foreclosure” in M.G.L. c. 183A, § 22 only applied to procedures of M.G.L. c. 244 or a bill in equity to foreclose, not a deed in lieu transaction.
The court in Moloney disagreed with the lender and held that “a deed in lieu of foreclosure is the functional equivalent of formal foreclosure for purposes of M.G.L. c. 183A, § 22, with the result that a lender that takes over a condominium project either through ‘foreclosure’ or by accepting a deed in lieu of foreclosure succeeds to the obligations and liabilities of the developer.” In support of its decision, the court noted that M.G.L. c. 244 does not formally define “foreclosure”, and looked to the “intent of the Legislature ascertained from all its words construed by the ordinary and approved usage of the language, considered in connection with the cause of its enactment, the mischief or imperfection to be remedied and the main object to be accomplished, to the end that the purpose of its framers may be effectuated.”
The court determined that the purpose and effect of a deed in lieu and a foreclosure are essentially the same, i.e., the collection of a security and the settlement of foreclosure litigation.
While the court found that a deed in lieu is a “functional equivalent” to a foreclosure, the court also noted that there are several real differences between formal foreclosure and a deed in lieu. For example, a formal foreclosure procedure eliminates junior liens, and deeds in lieu do not. The court concluded that “a lender who takes a deed in lieu is generally less protected than a lender using formal procedures.”
Whether or not a deed in lieu is an appropriate remedy depends of a number of factors. For example is there equity in the property over the mortgage balance? Are there junior liens or tax considerations? Does the lender want the property in its OREO portfolio or have a third party buyer? Will the lender incur any exposure or liability from accepting title in this manner and or will the borrower have a deficiency to deal with or will it impact any bankruptcy issues?
Although a deed in lieu of foreclosure may appear a sensible solution, many factors must be analyzed and reviewed before any decision is reached by both borrower and lender.