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 loan provider must carry out to figure out if it must take an assignment of a designer's agreement as part of a deed-in-lieu of foreclosure deal.

Deeds-In-Lieu of Foreclosure Generally
Taking back a deed to a residential or commercial property is an alternative to the often lengthy and costly judicial procedure of foreclosing on a delinquent loan. In a "deed-in-lieu" transaction, the celebrations agree that the lender will take title to the genuine residential or commercial property protecting the customer's defaulted note in exchange for the lending institution releasing 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 files (the deed, deed-in-lieu arrangement and estoppel affidavit) normally provide that the parties plan not to merge the mortgage into the ownership of the residential or commercial property (the "cost" interest). A non-merger endorsement needs to be obtained from the title business to guarantee that the deed and mortgage remain different.

The debt needs to be preserved if the loan provider requires to begin a foreclosure to clean out junior liens and encumbrances after it ends up being the cost owner. This can be done by making the debt non-recourse regarding the customer in the deed-in-lieu agreement. (Note that some courts beyond Wisconsin have actually held that merger of the mortgage and cost interest does happen if the loan provider takes title with understanding of several junior liens, meaning that the commitments evidenced by the junior liens can not be extinguished).

Due Diligence
Before consenting to take a deed-in-lieu, a lending institution needs to undertake considerable due diligence due to the fact that it will be taking the property topic to all of its dangers and possible liabilities - i.e., ecological concerns, delinquent taxes, judgments, and other liens and encumbrances. The lender should make sure that it has actually evaluated all documents 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 job, and files evidencing a trademark or brand name for the job.

The loan provider needs to likewise carry out a comprehensive analysis of any designer's arrangement associating with the residential or commercial property before it decides to take an assignment. A developer's agreement is a contract between a municipality and a real estate developer that specifies the municipality's requirements for a development. It might include, for example, arrangements needing that public enhancements and facilities (such as streets, water, hygienic sewer, storm water drainage) be constructed, needing that just a certain kind of development can be constructed, dictating the maximum variety of domestic or industrial units, requiring that payments (such as connection charges) need to be made to the town, needing that a certain quantity of green area must be maintained, or requiring that streets or land must be committed to the municipality. Among other things, the lender will want to comprehend the commitments under the developer's agreement that have actually been finished, those that stay to be done and the expense of satisfying the staying responsibilities.

Lender's Options For Dealing With Developers' Agreements
The loan provider has various choices depending upon whether the designer's arrangement is subordinate to the lending institution's mortgage. If the developer's contract is subordinate to the mortgage, the lending institution may treat it the same as other junior liens on the residential or commercial property and foreclose out the designer's agreement (if the mortgage and the cost interest do not combine and the financial obligation has actually been maintained). On the other hand, this may not be the best strategy if future dealings with the town are needed.

If the lender is not going to foreclose out the developer's agreement (or if the developer's arrangement is not secondary to the lending institution's mortgage), the loan provider needs to decide whether to take a task of the arrangement. The first concern is whether it is assignable. The town may have required its prior grant any task. When a designer's arrangement does not state whether or not it might be designated, the basic law of assignability controls and, like other contracts that do not expressly permit or prohibit project, it would be assignable.

The more hard question is not whether the loan provider can take assignment, but whether it should. There is nobody aspect that drives this choice - rather, the loan provider needs to weigh the effect of multiple factors to determine what option will best serve its interests. Principle elements include:

Whether the lender has actually provided the town with a letter of credit. As part of a designer's agreement, a town might require the designer to post a letter of credit as guarantee for satisfying the requirements in the arrangement. The loan provider might have supplied such a letter of credit. If the loan provider is "stuck" with the expense of finishing the staying requirements under the designer's agreement anyhow, because it has actually supplied the letter of credit, it may make more sense to take a project.
What stage of development the task remains in at the time. The lender needs to determine the stage of the development. If the uncompleted work is substantial, the loan provider may not wish to take a task of the developer's contract, as it may not wish to commit to doing all that is still needed.
Whether the municipality wants to work out. Instead of taking a project, the lending institution might wish to think about approaching the municipality to renegotiate the designer's contract (for instance, allowing a multi-family apartment instead of single-family lots). If a development has stagnated and the lender thinks the existing scheme in the developer's contract is not marketable under existing conditions, the loan provider may wish to renegotiate a designer's arrangement to fit present market conditions. The lender needs to consider the possibility that it might be tipping its hand to the municipality that a bank is included, which the municipality could view as a "deep pocket" to end up the advancement. Most significantly, the loan provider needs to reach out to the municipality only if the borrower/developer concurs and is, in addition to its counsel, included in the conversation, which need to decrease or avoid any allegations that the loan provider interfered with the borrower/developer's service.

Pros and cons associated with taking a task of a designer's agreement as part of a deed-in-lieu deal likewise include:

Pros:

- The lender has utilize with the town by providing to take the assignment and might be in a much better position to renegotiate the developer's arrangement in connection with the deed-in-lieu transaction (subject, as gone over above, to the borrower/developer's consent and participation).
- By taking an assignment, the loan provider can even more assign the designer's contract as part of a sale to another designer, enhancing its capability to understand the worth of the security.
- The loan provider might have the ability to reduce or get rid of a letter of credit it has in place with the municipality by taking an assignment and thus accepting finish the staying obligations under the designer's arrangement.

Cons:

- The lender will presume the liability of the borrower/developer for its previous acts or omissions under the developer's contract.
- The lending institution may go through claims from 3rd parties for work it finishes after taking the task.
- The lender may require to employ a professional management company to help the lender with handling the commitments under the designer's agreement.
- If the borrower/developer remains in default of provisions of the designer's contract, the lending institution might have to expend a considerable quantity of cash to treat such default.
- The municipality may see the lending institution as a "deep pocket" to complete the remaining commitments under the developer's contract.

Understand the Fundamentals of Each Unique Situation
Ultimately, a lender's decision whether to take a task of a designer's contract as part of a deed-in-lieu transaction will involve analysis of all of the aspects described in this Update. This analysis will enable the lending institution to establish a more complete photo of the benefits and threats of taking a project before making this essential decision.

von Briesen Legal Update is a periodic publication of von Briesen & Roper, s.c. It is meant for basic details purposes for the community and highlights recent changes and developments in the legal area. This publication does not constitute legal recommendations, and the reader must seek advice from legal counsel to figure out how this info uses to any particular situation.