In today’s economic climate, homeowners in default on their note and mortgage obligations may believe that foreclosure is inevitable.  However, a deed in lieu of foreclosure is an alternative that homeowners facing foreclosure should consider.

I. Advantages

1. Virgin Islands law[1] recognizes the social desirability of allowing a commercial lender and borrower to “workout” a problem loan through a deed in lieu of foreclosure, noting that it is “common for a mortgagee to take a conveyance from the mortgagor in full or partial satisfaction of the mortgage obligation and as a substitute for foreclosure.” Land Holdings (St. Thomas) Ltd. v. Mega Holdings, Inc., 1999 WL 1044836 at *4, n. 5 (D.V.I. 1999) (citing, Restatement (Third) Property: Mortgages § 8.5, at 608 (1997))

2. The lender may opt for a deed in lieu of foreclosure if the debt is so large that the borrower cannot repay it.  

3. The Virgin Islands Stamp Tax Act imposes a two percent excise on the value of real property transferred “by instrument of conveyance.”  33 V.I.C. § 121(a)(1) (1994). However, an exemption from the Virgin Islands Stamp Tax specifies that excise tax “shall not apply to a transfer of title … solely in order to provide or release security for a debt or obligation.” 33 V.I.C. § 128(a)(2) (1994). Conveyances by deed in lieu of foreclosure may be exempt from the Virgin Islands Stamp Tax because the borrower transfers the property to the lender in order to satisfy a debt or obligation. Therefore, the borrowers should execute and submit an Affidavit For Exemption From Stamp Tax in order to request an exemption from the Virgin Island Stamp Tax.

4. Executing a deed in lieu of foreclosure saves the parties the time and money.  The lender will obtain title to the property immediately rather than waiting for the legal proceeding to conclude. The parties also save the legal fees and costs associated with a judicial foreclosure and Marshal’s Sale.

5. By executing a deed in lieu, the lender typically accepts the property in full satisfaction of the debt. The lender may even agree to waive its right to seek a deficiency judgment against the borrower.

II. Beware

1. The mortgagee (usually the lender) always must be on the alert for junior interests because a “deed in lieu of foreclosure is not, after all, a foreclosure, and it will not operate to terminate such [interests].” Land Holdings (St. Thomas) Ltd. v. Mega Holdings, Inc. 1999 WL 1044836 at *5 (D.V.I. 1999) (citing, Restatement (Third) of Property (Mortgages) § 8.5 cmt. b, at 612)). Examples of the types of liens that can be filed against real property are tax, construction and homeowners association liens.

2. Property taxes have to be paid in order to record the Deed In Lieu in the Office of the Recorder of Deeds. Therefore, if the borrower has not paid property taxes, the lender will be required to pay the property taxes before the Deed in Lieu will be recorded. The lender can request a Property Tax Status report. The Office of the Recorder of Deeds charges Twenty Five ($25.00) and 00/100 Dollars for a Property Tax Status Report.

II. Checklist

1. Obtain a Property Tax Status Report to determine whether or not property taxes have been paid. 

2. Draft a deed in lieu of foreclosure

3. Draft an affidavit for exemption from the Virgin Islands Stamp Tax. 

4. Draft a release of mortgage. 

5. Fees and Costs For Deed In Lieu incurred by:

a. Ordering a Property Tax Status Report.

b. Obtaining an Updated Title Search to verify that there are no liens/encumbrances on the property.

c. Drafting the Deed In Lieu.

d. Drafting the Affidavit for Exemption of Property Taxes.

e. Drafting the agreement to forgive any deficiency (the amount of the loan that is not covered by the sale proceeds) that remains after the house is sold.

f. Paying Fees to Record the Deed at the Office of the Recorder of Deeds. The recording fee will be $15.00 for the first $3,000.00 of the value of the property + $1 for each additional $1,000.00 of the value of the property + $1 for each page to be recorded (the tax clearance letter is considered a page so add $1 for this letter, as well) + $2.50 for the first page of any attachment (in this case, the Affidavit for exemption from Stamp Tax) + $1.00 for the other pages of the attachment. 

g. Paying attorney’s fees.

h. Dismiss the judicial foreclosure pending in Court.

Nycole Thompson is an attorney with the Litigation Practice Group of BoltNagi PC. a full service business law firm in St. Thomas, Virgin Islands.