Frequently a mortgage or deed of trust against
raw land will have what are known as “release provisions.”
These provisions allow the owner of the land to have provisions
of it released from the mortgage as the debt is paid down.
Property owners who are about to default on a debt secured
by land normally will take any releases to which they are
entitled before defaulting. This has happened with increasing
frequency over the last several years as the land market in
many areas has collapsed. There is nothing legally improper
with taking such releases on the eve of a default, and there
is usually nothing the noteholder can do to prevent it —
nothing, that is, unless the property owner admits to the
noteholder he is going to default. If that happens, the rules
can suddenly change.
In a recent case, a property owner told the noteholder as
a courtesy that he was going to default in a balloon payment
that was due in several days. Shortly thereafter, he complied
with all the requirements necessary to obtain a release, which
included tendering a partial payment of the note and furnishing
a legal description and survey. The noteholder then refused
to grant the release, arguing, among other things, that the
owner was not entitled to a release because he was in default.
The type of default was called “anticipatory repudiation,”
which is a statement by a party to a contract that he intends
to breach the contract in the future. When this happens, the
courts say that the party has repudiated the contract and
is therefore in breach of the contract as of the time he makes
the statement. Because the deed of trust allowed releases
only when there is no default, the owner lost his right to
a release by telling the noteholder he was going to default.
In other words, the property owner's honesty cost him his
release.
Additional Ruling
In this same decision, the Court issued another interesting
ruling. The Court held that release provisions must be complied
with strictly and exactly. A release request for 29.9897 acres
was invalid where the deed of trust specified all releases
must be at least 30 acres. The theory of
“substantial performance,” which is often applied
to other contracts, does not apply when a release is requested.
If you want a release, it is not enough to substantially comply
with the requirements — you must comply exactly.
The Lessons
- There are several valuable lessons we can learn from
this decision:
If you want to obtain a release under a deed of trust, do
not tell the noteholder you intend to default later.
- If you own a note and the payor requests a release, ask
him if he is going to default. If he says he is, refuse
to grant the release
- If you request a release, comply with all the requirements
strictly, exactly, and on time.
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