Deed in Lieu of Foreclosure: What Commercial Lenders and Borrowers Need to Know in New Jersey

A lender can take a deed in lieu of foreclosure in New Jersey, and a title company will insure it, if the transaction is structured correctly. A deed in lieu of foreclosure may be a more expedient way to recover collateral in a judicial foreclosure state. However, a deed in lieu has its limits. The deed does not cut off junior liens and a lender will need to determine (i) whether the realty transfer fee must be paid and (ii) whether a bulk sale notice must be filed with the Division of Taxation. The structure has to be right before the deed is signed. This article explains the deed in lieu mechanics. The article addresses commercial loans only. Residential mortgages are governed by the Fair Foreclosure Act and consumer protection rules that do not apply to a commercial workout.

What a Deed in Lieu of Foreclosure Is and What It Is Not

A deed in lieu of foreclosure is a deed from a borrower to its mortgage lender or to an affiliated entity the lender designates, given and accepted instead of a foreclosure. The lender gets the property. The borrower commonly gets a release of the debt, a covenant not to sue, or some other agreed limit on its liability. In a commercial transaction the deed generally comes with an assignment of the leases, security deposits, service contracts and personal property, an estoppel affidavit in which the borrower confirms that the conveyance is absolute, and a deed in lieu agreement that states the consideration, the releases and the representations on which the lender is relying.

No New Jersey statute governs a commercial deed in lieu. The Fair Foreclosure Act defines the term, but only for residential mortgages, as a “voluntary, knowing and uncoerced conveyance by the residential mortgage debtor to the residential mortgage lender”. N.J.S.A. 2A:50-55. A commercial deed in lieu is governed by contract and by equity.

A deed in lieu is not a foreclosure. A foreclosure judgment and Sheriff’s sale cut off the interests of the junior lienholders and subordinate tenants joined in the action. A deed in lieu does not cut off the interests of a junior lienholder or a subordinate tenant. When taking a deed in lieu, the lender takes title subject to any second mortgage, judgment lien, construction lien and tax lien. Because those interests survive the deed, the lender has two choices. It can require that every junior lien be paid, released or subordinated before it accepts the deed, or it can keep its mortgage alive after taking title so that it can foreclose the junior interests later.

Why Lenders and Borrowers Agree to a Deed in Lieu

For the lender, the attractions are speed, cost and control. A contested New Jersey commercial foreclosure passes through the Office of Foreclosure and the county Sheriff and can take, even if uncontested, nine months or more to prosecute while interest, fees and carrying costs accrue. A deed in lieu can close in a short period, avoids a receivership and lender liability counterclaims and delivers the property from owner to the lender, often with an orderly turnover of the books and records, leases, deposits and keys.

For the borrower and its principals, the attraction is a release of claims. A deed in lieu is the occasion for borrowers to negotiate a release of personal liability under a recourse loan or a non-recourse carve-out guaranty, to avoid a foreclosure judgment of record and to control the timing of the turnover of the property.

A deed in lieu does not fit every default. It rarely works where junior liens exist that cannot be paid or released, where the borrower is insolvent with other creditors circling, where the property is worth more than the debt or where the lender would rather keep its guaranty claims and foreclose.

Rule One: The Deed Must Be a Conveyance, Not Security

New Jersey courts look past the form of a document to its substance. A deed that is in reality security for a debt is a mortgage, whatever it is called, and a mortgage can be enforced only by foreclosure, with the borrower keeping its equity of redemption until the sale. A lender that takes a deed in lieu without attention to this rule can find that it holds a mortgage rather than title.

In Zaman v. Felton, 219 N.J. 199 (2014), the Supreme Court adopted the eight factors first set out in O’Brien v. Cleveland, 423 B.R. 477, 491 (Bankr. D.N.J. 2010), for deciding whether a transaction documented as a sale is an equitable mortgage: (1) statements by the owner, or representations by the purchaser, indicating that the owner was to continue in ownership, (2) a substantial disparity between the value the owner received and the fair market value of the property at the time of the transaction, (3) an option to repurchase, (4) the owner’s continued possession of the property, (5) the owner’s continuing responsibility for the burdens of ownership, such as real estate taxes and maintenance, (6) a disparity in bargaining power and sophistication, including the owner’s lack of counsel, (7) an irregular purchase process, such as no listing, no appraisal and no title investigation, and (8) the owner’s financial distress, including an imminent foreclosure and prior unsuccessful attempts to obtain a loan. Id. at 218-19. The Felton Court repeated the settled rule that once a transaction is a mortgage, the parties “cannot by any stipulations, however express and positive, render it anything but a mortgage”. Id. at 217.

The related rule against clogging the equity of redemption prohibits a lender from taking, as part of the loan, any device that lets it acquire the property without foreclosing. In Humble Oil & Refining Co. v. Doerr, 123 N.J. Super. 530 (Ch. Div. 1973), the Chancery Division voided a purchase option granted as part of a mortgage financing without any inquiry into whether it was fair. The rule has two sides, and the Appellate Division stated both in Smith v. Shattls, 66 N.J. Super. 430, 436-37 (App. Div. 1961), relying on Dorman v. Fisher, 31 N.J. 13 (1959). A mortgagor cannot give up the right to redeem by an agreement that is part of, or made at the same time as, the mortgage.

A mortgagor may, however, at any time afterward, by a separate and distinct transaction, sell or release its equity of redemption to the mortgagee. Humble Oil adds that the later bargain must be fair and supported by independent consideration, and that the burden of proving fairness rests on the mortgagee. That is the legal foundation of a New Jersey deed in lieu. A deed signed at the loan closing and held in escrow is considered a mortgage. A deed negotiated later, in a separate transaction, for new consideration, with a borrower that had counsel and understood what it was giving up, is considered a conveyance.

The Appellate Division applied the separate transaction rule to an escrowed deed in Mallozzi v. Cerciello, No. A-2838-07, 2009 N.J. Super. Unpub. LEXIS 402 (App. Div. Feb. 10, 2009), an unpublished decision that shows how a New Jersey court works through the question. The purchaser of a property in Elizabeth signed a deed back to the seller at a closing in 2002, to be held in escrow and recorded if the purchaser defaulted on the purchase money mortgage. Standing alone, that arrangement is considered a clog on the equity of redemption. After the purchaser defaulted, the parties signed a mortgage extension agreement in which the purchaser expressly agreed that any further default would allow the seller to record the deed in lieu of foreclosure. When the purchaser again defaulted and the deed was recorded, the court upheld the transfer, because the extension agreement was a separate and distinct transaction entered into after default and the purchaser had acknowledged in the later transaction that the deed was a deed in lieu. The extension agreement is what saved the deed for the seller. A deed signed at closing is rescued, if at all, by a later written agreement made after default in which the borrower ratifies the deed in lieu and receives consideration for delivering the deed in lieu.

In practice: the question is whether the deed was part of the loan or a separate bargain made later. A default is not legally required. Under Smith v. Shattls the borrower may release its equity of redemption at any time after the mortgage is made, so a deed given in exchange for a maturity extension, a further advance or a loan modification can qualify if it is a separate transaction supported by new consideration. A default may make the case easier to prove, because it supplies an obvious reason for the bargain and an obvious measure of the consideration and it is the fact pattern that title underwriters are most comfortable with. Whatever the occasion, the file should establish, and the documents should recite, that the deed was negotiated after the loan was made and for new consideration, that the debt equals or exceeds the value shown by a current appraisal or broker opinion, that the conveyance is absolute with no option, right of first refusal, share of resale proceeds or retained possession and that the borrower received real consideration, ordinarily the release of the debt or a covenant not to sue. The borrower should have counsel and the agreement should recite this.

Rule Two: Keep the Mortgage Alive

When the holder of a mortgage acquires the fee, the common law doctrine of merger can extinguish the mortgage as the lesser estate absorbed into the greater. If that happens, every junior lien moves up in priority and the lender has lost the one remedy that could clear them: a foreclosure of its mortgage, which would cut off the juniors.

New Jersey courts have said for more than 150 years that merger is not favored in equity and is allowed only to carry out the intention of the party who unites the two estates. Clos v. Boppe, 23 N.J. Eq. 270 (Ch. 1872). When a mortgagee acquires the equity of redemption, the law presumes an intent to merge, but the presumption is rebuttable and yields where merger would prejudice the mortgagee or where a contrary intention is expressly declared (Gimbel v. Venino, 135 N.J. Eq. 574 (Ch. 1944), and the New Jersey authorities collected by the Third Circuit in In re B.F. Dewees, Inc., 404 F.2d 519 (3d Cir. 1968)). The caution is Tennenberger v. Sozio, 101 N.J. Eq. 64 (Ch. 1927), where merger was found because the mortgagee took the premises in satisfaction of the debt and nothing showed a contrary intent. A lender that releases the debt in exchange for the deed, with nothing said about the mortgage, may be held to have supplied the evidence of intent to merge that the doctrine looks for.

Below is a short list of drafting rules from the New Jersey case law:

1. Include a non-merger clause in both the deed in lieu agreement and the deed itself, stating that the mortgage remains a lien separate from the fee, is not satisfied by the conveyance, and may be foreclosed against any junior interest.
2. Do not record a satisfaction, discharge or cancellation of the mortgage.
3. Give the borrower and the guarantors a covenant not to sue rather than a release of the debt, or a release that expressly preserves the debt for enforcement against the property only, so that a debt remains for the mortgage to secure.
4. Consider taking title in a newly formed affiliate of the lender rather than in the lender itself, so that the fee and the mortgage are held by different entities. The case law does not require it, but it removes the factual premise of merger, which is that one party holds both estates, and it costs little.
5. Make the payoff, release or subordination of every known junior lien a condition of closing and run title down to the moment of recording.
6. If a junior lienholder will not cooperate, foreclose the mortgage against that lienholder after closing. The borrower’s cooperation in that action can be a term of the deed in lieu agreement.

Rule Three: Make It Insurable

Title underwriters are careful about how they treat an owner’s policy issued to the grantee of a deed in lieu. The reason is that a deed in lieu can be attacked by the borrower as a disguised mortgage and by the borrower’s creditors or a bankruptcy trustee as a fraudulent transfer or preference. The following are documents that may need to be delivered to the title company:

1. Evidence of the loan, of any default, and of the value of the property, usually the loan documents, a payoff statement and a current appraisal or broker opinion of value. The underwriter is not applying the equitable mortgage rule here. A separate transaction for new consideration satisfies that rule. The underwriter is protecting against the fraudulent transfer and preference claims discussed in Rule Four below, which turn on whether the borrower received reasonably equivalent value for the property. If the property is worth more than the debt, the underwriter will expect the borrower to be paid the difference or may decline the risk.
2. A deed in lieu agreement that recites the loan history and the default, states that the conveyance is absolute and voluntary, waives the equity of redemption and any right to enjoin the transaction and confirms that the grantor retains no option, right of first refusal, share of resale proceeds or right of possession.
3. An estoppel affidavit signed by the grantor confirming that the deed is an absolute conveyance and not a mortgage or other security, that the grantor retains no right to reacquire the property, that the consideration represents the fair value of the property, that no bankruptcy is pending and that the conveyance is not a preference.
4. For an entity grantor, the organizational documents, good standing certificates and a resolution or consent of every member or partner whose approval is required to convey substantially all of the entity’s assets.
5. Judgment, lien, UCC and bankruptcy searches against the grantor and its principals, run down to recording.
6. Confirmation of how the mortgage will be treated. If the mortgage is not released, it is excepted from the owner’s policy.
7. Payoff or release of all junior liens of record. Any lien not released remains an exception in the policy.
8. The realty transfer fee affidavits (RTF-1 and RTF-1EE) and the GIT/REP form required to record the deed, discussed below.

One more point about coverage. Lenders sometimes assume that their loan policy will protect them once they hold title. Under the ALTA loan policy, coverage continues in favor of an insured that acquires title by conveyance in lieu of foreclosure, but only as to the state of title on the date of the loan policy and only up to the policy amount. It does not insure the validity of the deed in lieu or anything that attached to the property after the loan closed. Counsel for a lender taking a deed in lieu should discuss with the client the purchase of a new owner’s policy in the name of the grantee.

Rule Four: The Deed Must Survive the Borrower’s Creditors

The borrower’s other creditors are the second source of attack on a deed in lieu. A borrower that gives a deed in lieu is in financial trouble, and it is handing an asset to one creditor at a time when other creditors may go unpaid. Bankruptcy law and New Jersey’s fraudulent transfer statute give those creditors, or a trustee acting for them, a way to undo that kind of transfer. Within 90 days after the transfer, a bankruptcy trustee can seek to recover a transfer to a creditor on account of an antecedent debt, made while the debtor was insolvent, if it enabled the creditor to receive more than it would have received in a chapter 7 liquidation. 11 U.S.C. § 547(b). Within two years, the trustee can avoid a transfer for which the debtor received less than reasonably equivalent value while insolvent. 11 U.S.C. § 548(a)(1)(B). Outside bankruptcy, creditors have the same constructive fraud claim for four years under New Jersey’s Uniform Voidable Transactions Act. N.J.S.A. 25:2-25 and 25:2-31.

Foreclosure sales have a safe harbor that deeds in lieu do not. In BFP v. Resolution Trust Corp., 511 U.S. 531 (1994), the Supreme Court held that the price received at a non-collusive foreclosure sale conducted in compliance with state law is reasonably equivalent value as a matter of law and New Jersey writes the same rule into its statute for a regularly conducted, non-collusive foreclosure sale. N.J.S.A. 25:2-24(b). The safe harbor protects a sale that was conducted under the foreclosure statutes and was not arranged between the parties to produce a particular result. A negotiated deed in lieu is tested on its facts: what was the property worth and what did the borrower receive for it?

That is why the appraisal matters as much to the lender as to the title company. Where the debt exceeds the value of the property and the lender releases the debt or covenants not to sue, the borrower has received full value and there is nothing to recover. Where the property is worth more than the debt, the excess belongs to the borrower’s creditors, and a lender that takes it invites a claim. Keep the appraisal in the file, take solvency and value representations and keep the mortgage alive, so that if the deed is ever set aside the lender is restored to the position of a secured creditor.

Rule Five: Budget for New Jersey’s Costs

The bulk sale notice (Form C-9600)

New Jersey’s bulk sale law requires the purchaser of business assets, other than in the ordinary course of business, to notify the Division of Taxation at least ten business days before closing by filing Form C-9600. A purchaser that fails to do so becomes liable for the seller’s unpaid New Jersey taxes. N.J.S.A. 54:50-38. The Division applies the statute to deeds in lieu. Its published bulk sale guidance distinguishes a Sheriff’s sale, which transfers title free of encumbrances and requires no notice, from a deed in lieu of foreclosure of property that is or has been used for income-producing purposes, which is a bulk sale requiring timely notice. The Tax Court reached the same result under the earlier statute, holding a lender that acquired hotel assets by deeds in lieu without notice liable for the borrower’s taxes. N.J. Hotel Holdings, Inc. v. Director, Division of Taxation, 15 N.J. Tax 428 (Tax 1996).

The practical difficulty is the escrow. The Division responds to the notice with a letter stating the amount to be held back from the purchase price and a borrower giving a deed in lieu has no purchase price and usually no cash. The lender must decide whether to fund the escrow, wait for a clearance showing no liability or accept the exposure.

The realty transfer fee and the Graduated Percent Fee

New Jersey imposes the realty transfer fee on the grantor and measures it by the consideration for the deed. The statute defines consideration to include “the remaining amount of any prior mortgage to which the transfer is subject or which is to be assumed and agreed to be paid by the grantee”. N.J.S.A. 46:15-5(c). The Division of Taxation applies that definition to a deed in lieu. Its realty transfer fee guidance states that when a bank takes real estate back to avoid a Sheriff’s sale and does not cancel the mortgage, the fee is due on the remaining balance of the mortgage. Since Rule Two tells the lender to keep the mortgage open, the lender should expect to pay the fee on the unpaid balance of the mortgage, which is the consideration reported on the RTF-1 Affidavit of Consideration for Use by Seller that must accompany every deed of commercial property.

If instead the lender discharges the mortgage in exchange for the deed and gives no other consideration, the deed is commonly recorded as exempt under the provision for a deed given “solely in order to provide or release security for a debt or obligation”. N.J.S.A. 46:15-10(c). The exemption is claimed on the RTF-1 by checking that reason in the full exemption section of the affidavit. In such event, the lender saves the fee, but it gives up the mortgage and with it the ability to foreclose the junior liens, which is the merger problem described in Rule Two.

Since July 10, 2025, transfers of Class 4A property for consideration above $1,000,000 also carry the Graduated Percent Fee, which replaced the former one percent fee and is now imposed on the grantor rather than the grantee (N.J.S.A. 46:15-7.2, as amended by P.L. 2025, c. 69). Class 4A is the tax list classification for income-producing property that is neither industrial nor an apartment building, such as office buildings, shopping centers, retail stores, restaurants, hotels and most mixed-use buildings. N.J.A.C. 18:12-2.2. The Graduated Percent Fee also applies to Class 2 residential property of four units or fewer, to farm property with a residence, and to cooperative units. It does not apply to Class 4B industrial property or to Class 4C apartment buildings of five or more units. A lender taking back a multifamily building of five or more units therefore pays the realty transfer fee but not the Graduated Percent Fee. The classification on the tax list when the deed is recorded controls. The rate applies to the entire consideration, not just the amount above each threshold: one percent from $1,000,001 to $2,000,000, two percent above $2,000,000 to $2,500,000, two and one half percent above $2,500,000 to $3,000,000, three percent above $3,000,000 to $3,500,000, and three and one half percent above $3,500,000 (Division of Taxation notice). On a $5,000,000 mortgage balance kept open, the Graduated Percent Fee alone is $175,000. Because the borrower rarely has the funds, the lender pays in practice, and the agreement should say who pays, who signs the RTF-1 and RTF-1EE affidavits, and how the fees are treated in any deficiency calculation. The RTF-1EE Affidavit of Consideration for Graduated Percent Fee must be annexed to every deed of commercial property and every deed for consideration over $1,000,000, whether or not the fee is due. By contrast, a Sheriff’s Deed is taxed on the amount bid plus any superior liens that remain (Form RTF-8) and a lender bidding at its sale controls the upset price.

The GIT/REP form

No deed is recorded in New Jersey without a GIT/REP form. Most commercial borrowers are entities, and an entity seller checks box 5 of the GIT/REP-3, which states that the seller is not an individual, estate or trust and is not required to make an estimated gross income tax payment. Where the borrower is an individual, box 3 covers a seller that is a mortgagor conveying the mortgaged property to a mortgagee in foreclosure or in a transfer in lieu of foreclosure with no additional consideration, which relieves a nonresident seller of the estimated gross income tax payment otherwise collected at recording.

ISRA and the Spill Act

Two environmental statutes can change the economics. The Industrial Site Recovery Act applies when an industrial establishment changes ownership, and a deed, unlike a mortgage, is a change in ownership. N.J.S.A. 13:1K-8. A mortgage holder is not an owner or operator under ISRA until it takes title by deed (N.J.A.C. 7:26B-1.4), so a deed in lieu of an operating industrial property requires ISRA compliance by the borrower before the transfer. A borrower that cannot pay for that compliance cannot deliver the deed.

Under the Spill Compensation and Control Act, a lender that did not participate in management keeps its lender protection after acquiring title in lieu of foreclosure (N.J.S.A. 58:10-23.11g4), provided it divests the property in a reasonably expeditious manner by listing it within twelve months, not ignoring a bona fide offer of fair consideration received after six months and divesting within five years (N.J.S.A. 58:10-23.11g6). The federal secured creditor exemption is to the same effect (42 U.S.C. § 9601(20)(E)). A Phase I environmental site assessment before accepting the deed and a written disposition plan afterward are the minimum.

The Debt, the Deficiency and the Guarantors

In a commercial foreclosure, a New Jersey lender is not required to foreclose before suing on the note or the guaranty, because the statute that imposes that sequence does not apply where the debt was incurred for a business or commercial purpose. N.J.S.A. 2A:50-2.3. In a deed in lieu, none of the foreclosure machinery runs. There is no Sheriff’s sale and no bidding. Whether the borrower and the guarantors remain liable for any shortfall is decided entirely by the agreement.

There are three common outcomes. The lender may release the borrower, the guarantors or both from the debt in full while preserving the debt against the property. That is the borrower’s goal and is often the price of a prompt and cooperative transfer. The lender may give a covenant not to sue the borrower and/or the guarantors, which has the same practical effect for them but keeps the debt and the mortgage alive against the property. Or the lender may preserve a deficiency claim, usually capped at an agreed figure, in exchange for a release of the borrower’s claims against the lender.

Non-recourse carve-out guaranties require particular care. A deed in lieu does not itself trigger full recourse under most forms, but the guarantor will want an express consent to the transfer and the lender may want the environmental indemnity and the carve-outs for misapplied rents, deposits and insurance proceeds to survive for a stated period. The guarantors should join in the agreement, release the lender from lender liability claims and receive their releases or covenants in return. Before any of this is discussed, both sides should sign a pre-negotiation agreement confirming that nothing is binding until final documents are signed and that the lender reserves its rights.

The Closing Checklist

A well documented New Jersey commercial deed in lieu includes the following:

1. A pre-negotiation agreement;
2. A deed in lieu agreement with representations as to title, leases, contracts, environmental matters and solvency, the consideration, the release or covenant not to sue, survival of the environmental indemnity and selected carve-outs, the non-merger provision, an “as is” conveyance and closing conditions covering title, junior liens and the Division of Taxation’s response to the bulk sale notice;
3. A bargain and sale deed with covenants against grantor’s acts containing the non-merger recital and the estoppel recitals;
4. An estoppel affidavit and the owner’s title affidavit;
5. A bill of sale for personal property and an assignment and assumption of leases, security deposits, service contracts, permits, licenses and warranties, with notices to tenants and vendors;
6. Guarantor joinders, releases and covenants not to sue running in both directions, with the agreed survival provisions;
7. Entity authority documents and good standing certificates for the grantor and the grantee;
8. The RTF-1 and RTF-1EE affidavits, the GIT/REP form, and the bulk sale notice and the Division’s response;
9. A Phase I report and ISRA documentation where the property is an industrial establishment;
10. The title commitment, the owner’s policy with negotiated endorsements, a survey update and estoppel certificates from the major tenants; and
11. A transition plan for management, insurance, utilities, rent collection and turnover of books, records and reserves.

Questions and Answers

Does a deed in lieu of foreclosure eliminate junior liens in New Jersey?

No. Only a foreclosure judgment and Sheriff’s sale cut off subordinate liens and leases and only as to the parties joined in the action. A lender that takes a deed in lieu takes title subject to every lien of record. That is why the lender keeps its mortgage alive with non-merger language and either requires releases of the junior liens at closing or forecloses against them afterward.

Can a lender require the borrower to sign a deed in lieu at the loan closing and hold it in escrow?

Not as a way around foreclosure. A deed delivered as security for a loan is generally considered to be a mortgage, whatever it is called, and a device that lets the lender take the property without foreclosing is void as a clog on the equity of redemption under Humble Oil & Refining Co. v. Doerr, 123 N.J. Super. 530 (Ch. Div. 1973). A deed negotiated later, as a separate and fair bargain for new consideration, is a different transaction and is permitted. In Mallozzi v. Cerciello, No. A-2838-07, 2009 N.J. Super. Unpub. LEXIS 402 (App. Div. Feb. 10, 2009), an unpublished decision, the Appellate Division enforced a deed that had been signed at closing and held in escrow because the borrower, after default, signed an extension agreement expressly agreeing that the deed could be recorded on a further default.

Is the borrower released from the debt when it gives a deed in lieu?

Only if the agreement says so. A conveyance accepted in satisfaction of the debt, with nothing more said, invites a finding that the debt and the mortgage were extinguished, which is the merger result lenders try to avoid. Most agreements therefore state exactly what happens to the debt: a full release, a covenant not to sue the borrower and the guarantors or a preserved and capped deficiency claim.

Will a title company insure a deed in lieu of foreclosure in New Jersey?

Yes. The underwriter will want to see that the deed was a separate transaction after the loan was made, for real consideration, that the conveyance is absolute with no retained rights, an estoppel affidavit, entity authority, lien and bankruptcy searches, no release of the mortgage and payoff or release of the junior liens. Those requirements track the New Jersey case law. A deed given in a separate transaction for new consideration satisfies the equitable mortgage rule, but the underwriter is also insuring against the borrower’s creditors, which is why it asks about value and solvency as well. The lender should buy a new owner’s policy because its loan policy insures only the mortgage lien. When the lender becomes the owner, the loan policy continues to protect it against title defects that existed on the day the loan closed, up to the loan policy amount, but it does not insure the deed in lieu itself, the lender’s ownership or anything recorded against the property after the loan closed. An owner’s policy issued to the grantee covers those matters. Title companies and their underwriters are cautious about these transactions and it is important to work with experienced counsel who can coordinate with the title company and the underwriter from the outset and advocate for the lender’s position, which the New Jersey case law supports.

Who pays the realty transfer fee on a deed in lieu, and how much is it?

Both the realty transfer fee and the Graduated Percent Fee are imposed on the grantor, but in a deed in lieu the lender almost always funds these fees because the borrower has no proceeds. When the mortgage is kept open, the Division of Taxation treats the unpaid balance of the mortgage as the consideration, and the realty transfer fee is computed on that figure and reported on the RTF-1 Affidavit of Consideration for Use by Seller. If the mortgage is discharged in exchange for the deed and nothing else is given, the deed is commonly recorded as exempt as one given solely to release security for a debt and that exemption is claimed on the same affidavit. The Graduated Percent Fee applies only when the consideration exceeds $1,000,000 and the property is Class 4A commercial (office, retail, hotel, mixed use and similar income-producing property), Class 2 residential of four units or fewer, farm property with a residence, or a cooperative unit. It does not apply to Class 4B industrial property or Class 4C apartment buildings of five or more units. The rate runs from one percent to three and one half percent of the entire consideration, and the RTF-1EE Affidavit of Consideration for Graduated Percent Fee must be annexed to every commercial deed and every deed over $1,000,000. The deed in lieu agreement should estimate and allocate these costs.

Does New Jersey’s bulk sale law apply when no money changes hands?

Yes. The Division of Taxation treats a deed in lieu of income-producing property as a bulk sale, and the Tax Court has held a lender liable for a borrower’s taxes for failing to give notice. N.J. Hotel Holdings, Inc. v. Director, Division of Taxation, 15 N.J. Tax 428 (Tax 1996). File Form C-9600 at least ten business days before closing and plan for the Division’s escrow demand.

Can the lender foreclose its mortgage after accepting a deed in lieu?

Yes, if the mortgage was preserved. Where the deed and the agreement state that the mortgage does not merge, no satisfaction was recorded and the debt was not released, the lender can foreclose against junior interests after taking title. Taking title in a separate entity is a precaution rather than a requirement, but it is an inexpensive one. Where the lender recorded a satisfaction or released the debt with nothing said about the mortgage, the mortgage is likely gone and the junior liens move up.

What happens if the borrower files bankruptcy after the deed is recorded?

The trustee or the debtor in possession can examine the transfer as a preference within 90 days or as a fraudulent transfer within two years, and creditors have four years under state law. The claim fails if the property was worth no more than the debt the borrower was relieved of, which is why the appraisal, the solvency representations and the preserved mortgage are part of every well documented deed in lieu.

About the Author

Adam S. Kessler is a real estate, business and litigation attorney at Kessler Law, LLC in Livingston, New Jersey. The firm represents lenders, borrowers and guarantors in commercial loan workouts, deeds in lieu of foreclosure and foreclosures throughout New Jersey. Private and bridge lenders will find additional resources at LendingLawyers.com.

This article is for general information and is not legal advice. The statutes, regulations and decisions cited were reviewed as of the date published and should be confirmed before they are relied on in a particular transaction.