Texas Commercial Law Firm

Borrowers seeking to avoid the stigma of foreclosure and a potential deficiency sometimes ask if they may voluntarily deed the property to the lender in exchange for release from the note. Such a transfer is referred to as a “deed in lieu of foreclosure” (“Deed In Lieu”). Deeds in Lieu may be especially appealing in situations where the lender has no intention of seeking a deficiency and where it would seem, therefore, that the lender is giving up nothing by accepting a Deed in Lieu.

Lenders usually view acceptance of a Deed in Lieu as a quicker, less expensive alternative to foreclosure. While this may be true in many states, because of the streamlined non-judicial foreclosure process in Texas, accepting a Deed in Lieu is not necessarily faster or less costly than non-judicial foreclosure. Accepting a Deed in Lieu on the other hand, carries with it significant risks under Texas law.

When a deed of trust lien is properly foreclosed non-judicially, most liens, leases and other intervening real property interests recorded or becoming enforceable after the deed of trust, (with the exception of ad valorem tax liens, weed liens and other encumbrances with special priority) are “cut off” by operation of law. Title is effectively “wiped clean” as to such interests from the effective date of the deed of the trust lien through the date of foreclosure.

The problem with a Deed in Lieu is that it will not cut off any intervening interests. In fact, the term “deed in lieu of foreclosure” is actually a misnomer -- it is nothing more than a deed given in consideration for release of the debt. Although the term has come to mean a “voluntary” or “friendly” foreclosure as the result of common usage, Deeds in Lieu have no legal significance in Texas real property law. In fact, the Texas Supreme Court has gone so far as to say: “there is no such deed as a deed in lieu of foreclosure”. Flag-Redfern Oil Company v. Humble Exploration, Co., 744 S.W.2d 6 (Tex. 1987). In other words, Texas law does not recognize a deed given “in lieu of foreclosure” as a specific category of deed affecting intervening liens any differently than a general or special warranty deed would.

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