Posted By: Anne E. Wal & Donald A. Schoenfeld & David I. Cisar

- Practice Area: Restructuring and Insolvency & Banking and Commercial Finance & Real Estate

This Update discusses the analysis that a Wisconsin lender should carry out to determine if it needs to take a task of a developer's agreement as part of a deed-in-lieu of foreclosure transaction.

Deeds-In-Lieu of Foreclosure Generally
Reclaiming a deed to a residential or commercial property is an alternative to the often prolonged and expensive judicial procedure of foreclosing on a delinquent loan. In a "deed-in-lieu" deal, the celebrations concur that the lender will take title to the real residential or commercial property securing the borrower's defaulted note in exchange for the lending institution launching the borrower (completely or partly) of its liability under the defaulted note.

Although the lender is both the residential or commercial property owner and lienholder after the deed-in-lieu transaction is completed, the documents (the deed, deed-in-lieu contract and estoppel affidavit) usually provide that the celebrations mean not to merge the mortgage into the ownership of the residential or commercial property (the "charge" interest). A non-merger endorsement ought to be obtained from the title company to guarantee that the deed and mortgage remain separate.

The financial obligation should be maintained if the lending institution needs to commence a foreclosure to eliminate junior liens and encumbrances after it becomes the fee owner. This can be done by making the debt non-recourse regarding the debtor in the deed-in-lieu arrangement. (Note that some courts outside of Wisconsin have held that merger of the mortgage and cost interest does occur if the loan provider takes title with understanding of several junior liens, implying that the obligations evidenced by the junior liens can not be extinguished).

Due Diligence
Before consenting to take a deed-in-lieu, a loan provider should undertake significant due diligence because it will be taking the realty subject to all of its risks and prospective liabilities - i.e., environmental problems, overdue taxes, judgments, and other liens and encumbrances. The loan provider must make sure that it has actually examined all files affecting the mortgaged residential or commercial property, consisting of easements, plats, encumbrances on the title, the closing book from the customer's acquisition of the residential or commercial property, all strategies prepared in connection with developing the project, and files evidencing a trademark or trade name for the task.

The lender needs to likewise carry out a thorough analysis of any developer's agreement associating with the residential or commercial property before it chooses to take a project. A designer's agreement is an agreement in between a municipality and a realty developer that defines the municipality's requirements for an advancement. It might consist of, for example, arrangements requiring that public improvements and infrastructure (such as streets, water, sanitary sewer, storm water drain) be constructed, requiring that only a certain kind of development can be built, determining the maximum variety of domestic or business units, requiring that payments (such as connection costs) must be made to the town, needing that a specific quantity of green area should be maintained, or needing that streets or land should be committed to the municipality. To name a few things, the lending institution will want to understand the commitments under the designer's arrangement that have actually been finished, those that stay to be done and the expense of satisfying the remaining responsibilities.

Lender's Options For Dealing With Developers' Agreements
The loan provider has different alternatives depending on whether the developer's agreement is secondary to the lending institution's mortgage. If the developer's arrangement is subordinate to the mortgage, the lending institution may treat it the like other junior liens on the residential or commercial property and foreclose out the developer's agreement (if the mortgage and the charge interest do not merge and the financial obligation has been protected). On the other hand, this might not be the very best strategy if future negotiations with the town are necessary.

If the loan provider is not going to foreclose out the developer's contract (or if the developer's contract is not secondary to the loan provider's mortgage), the loan provider needs to choose whether to take a project of the arrangement. The very first issue is whether it is assignable. The town may have needed its prior authorization to any project. When a designer's arrangement does not state whether it may be assigned, the basic law of assignability controls and, like other contracts that do not specifically permit or forbid assignment, it would be assignable.

The harder concern is not whether the loan provider can take assignment, but whether it should. There is nobody aspect that drives this choice - rather, the lender requires to weigh the impact of numerous factors to identify what alternative will best serve its interests. Principle elements include:

Whether the loan provider has actually provided the municipality with a letter of credit. As part of a developer's contract, a town might require the developer to post a letter of credit as guarantee for pleasing the requirements in the arrangement. The loan provider may have provided such a letter of credit. If the lender is "stuck" with the expense of finishing the staying requirements under the designer's contract anyhow, because it has offered the letter of credit, it may make more sense to take an assignment.
What stage of development the job remains in at the time. The lender needs to figure out the phase of the advancement. If the uncompleted work is considerable, the lender may not desire to take an assignment of the designer's arrangement, as it may not want to commit to doing all that is still needed.
Whether the municipality wants to work out. Instead of taking a task, the lending institution may want to consider approaching the municipality to renegotiate the developer's arrangement (for instance, permitting a multi-family apartment instead of single-family lots). If a development has stagnated and the loan provider thinks the existing scheme in the developer's arrangement is not valuable under present conditions, the lender may wish to renegotiate a developer's arrangement to fit existing market conditions. The lender needs to consider the possibility that it may be tipping its hand to the town that a bank is included, which the municipality could view as a "deep pocket" to finish the development. Most significantly, the loan provider should connect to the town just if the borrower/developer concurs and is, along with its counsel, involved in the discussion, which should minimize or avoid any claims that the lender interfered with the borrower/developer's organization.

Advantages and disadvantages connected with taking a project of a designer's arrangement as part of a deed-in-lieu deal also consist of:

Pros:

- The lending institution has utilize with the town by using to take the task and might remain in a better position to renegotiate the designer's arrangement in connection with the deed-in-lieu transaction (subject, as gone over above, to the borrower/developer's approval and involvement).
- By taking a project, the lending institution can even more appoint the designer's arrangement as part of a sale to another designer, boosting its capability to realize the value of the collateral.
- The lending institution might have the ability to minimize or remove a letter of credit it has in location with the town by taking a task and therefore consenting to finish the staying commitments under the designer's contract.

Cons:

- The lender will assume the liability of the borrower/developer for its prior acts or omissions under the developer's arrangement.
- The lending institution may go through claims from 3rd parties for work it finishes after taking the assignment.
- The lender might require to employ an expert management company to assist the lender with managing the obligations under the designer's arrangement.
- If the borrower/developer remains in default of arrangements of the designer's contract, the loan provider may need to use up a substantial amount of cash to treat such default.
- The municipality might see the lending institution as a "deep pocket" to finish the staying obligations under the developer's arrangement.

Understand the Fundamentals of Each Unique Situation
Ultimately, a lender's choice whether to take an assignment of a developer's contract as part of a deed-in-lieu transaction will involve analysis of all of the elements described in this Update. This analysis will allow the lending institution to develop a more total photo of the merits and dangers of taking a task before making this crucial choice.

von Briesen Legal Update is a regular publication of von Briesen & Roper, s.c. It is planned for general information purposes for the community and highlights current changes and developments in the legal location. This publication does not constitute legal guidance, and the reader ought to consult legal counsel to identify how this information uses to any specific circumstance.