When a borrower defaults on his or her commercial real estate loan in Washington, the bank has a number of options for collecting the debt. Lenders usually secure their real estate loans with deeds of trust, which gives the lender the option to foreclose on the collateral either non-judicially through a Trustee’s Sale, or non-judicially through a judicial foreclosure and subsequent Sheriff’s Sale. In each of those situations the rules governing the borrower’s and guarantor’s continuing liability on the loan after the sale differ.
Governor Inslee recently signed legislation passed by the Washington legislature which provides a mechanism for clearing up deeds of trust on title securing paid loans, without having to chase lenders. This is good news for the real estate industry.
Have you ever paid off a debt secured by a deed of trust on real estate, and had to waste time and money chasing the lender to get the trustee to reconvey the lien? It's a pain. Sure, there's been a 60 day time limit, requiring lenders and their trustees to release deeds of trust securing satisfied debts. If the deed of trust is not reconveyed within that time period, a lender is liable to the property owner for damages and attorney fees. RCW 61.16.030; I'm happy to report that the Washington legislature has created another tool to clear up title without bringing a lawsuit.
Representatives Roger Goodman (D-Kirkland) and Terry Nealey (R-Walla Walla) sponsored the new legislation which allows a title insurance company or agent, a licensed escrow agent, or a Washington attorney (collectively, “Agent”), who has paid a lender’s pay off demand in full from escrow powers to bring about a reconveyance of the lien securing the satisfied debt. Upon receipt of notice of the beneficiary's failure to request reconveyance, the Agent may submit proof of satisfaction of the debt and request the deed of trust trustee to reconvey the lien. If the trustee on the deed of trust is unable or unwilling to reconvey within 120 days following payment to the beneficiary in response to the beneficiary's demand statement, then the agent may record a notarized "declaration of payment" in the land records of the county(ies) where the deed of trust was recorded, and send a copy to the beneficiary and trustee.
The beneficiary or trustee then have 60 days to object to the "declaration of payment" by filing an "objection to declaration of payment". If no objection has been filed within 60 days, "any lien of the deed of trust against the real property encumbered must cease to exist". Magic - clean title.
This is a good law. Too often a lender is intensely interested in having its loan repaid, and then its attention to cleaning up the encumbered property is quickly distracted. Who wants to have to bring a lawsuit to clear title of a deed of trust which has been repaid? The costs and time involved are usually prohibitive. This new law, which will be codified at RCW 61.24.110 (2) and (3) provides an easy tool to do so.
Is there a downside? There is a possibility of a dishonest title insurance company or agent, escrow agent or attorney filing a false "declaration of payment," and then failing to send notice to the beneficiary. A subsequent examination of title in connection with a refinancing or sale would not consider the subject deed of trust to be valid, which could result in a secured loan not being repaid upon such event. The initial loss would fall on the title insurance company, insuring the new deed of trust and/or purchaser.
Ultimately, and hopefully, the guilty Agent filing the declaration of payment would be drawn and quartered, or at least be required to pay, and if the agent were a lawyer, severely disciplined.
More probably, less time will be wasted chasing down disorganized lenders to reconvey their liens. May it be so!
Please feel free to contact me if you have any questions!
We regularly update clients about changes in real estate law and on industry trends. This includes briefing clients on legislative proposals in the federal tax, housing and other legal areas affecting their businesses. Staying current enables you to anticipate and prevent legal problems as well as capitalize on new developments.