Many Marital Settlement Agreements (“MSA”) deal with the transfer of ownership of real property with the execution of a Quit Claim Deed but fail to deal with the underlying issues surrounding the debt owed on the property. If there is a loan on the property and both parties signed the note then the simple transfer of ownership does not relieve either party from the joint and several debt that is owed. Further, if the property is facing foreclosure then any party that is a signor on the note is exposed to attorney’s fees, costs, interest, and protection of collateral payments such as expensive force placed insurance and taxes. MSA’s that do not address these issues expose clients to hidden damages and therefore expose their attorneys to claims for malpractice.
MSA’s are contracts. The terms of the MSA can be enforced through the family court and some provisions can be enforced by contempt. However, the equitable distribution portions of the MSA are not subject to contempt and the requirements many times can be bankrupted. Therefore, it is important to be specific as to the terms of the MSA concerning real property and whether those terms and conditions can be avoided through bankruptcy.
The following is a list of many of the considerations that should be included when preparing the portion of a MSA dealing with real property:
Is the real property going to be the homestead of the grantee after the entry of the MSA:
The execution of a MSA does not by itself create a lien against the property. Therefore the terms and conditions of the MSA usually will not attach to the property if the property is the homestead of the person against whom enforcement of the terms and conditions is sought. Consider either executing the MSA in legally recordable form with the legal description of the property included, two witnesses for each signature, a notary for each signature, creation of lien language and waiver of homestead language for enforcement. If the parties wish to keep the other provisions of the MSA confidential then consider a reference in the MSA to a separate real property agreement and prepare the separate real property agreement in recordable form. You may even wish to title the separate real property agreement “Lien for Separate Real Property Agreement” so that any search of the property will list the Agreement as a lien. Title companies are used to finding and having to clear the requirements of liens.
Is the real property encumbered by a loan and who signed the Note:
When married persons purchase real property they both will be required to execute the mortgage. Banks are worried about a non-signing spouse defending a foreclosure action by raising the defense of homestead. They are NOT both required to sign the note unless the credit and/or income of both parties was used to secure the note. The only party that has a financial obligation for the debt is the person that actually signs the note. If one party is being divested of ownership, how is their liability as a signer of the note going to be dealt with? Have you included provisions for the note to be paid timely on a monthly basis? Have you included provisions that all requirements of the mortgage, such as taxes and insurance, must be complied with? Can the spouse that executed the quit claim deed force the sale of the property if the note is not timely paid? If yes, when, at what price and who will be the listing agent? What happens if the listing agent cannot get a contract at the listing price? Who will decide to lower the price and by how much? What is the formula to determine the minimum price at which both parties are required to execute a sales agreement and how much of a deposit is required? (This provision is usually contained in an Agreement that is not incorporated in or attached to the Final Judgment of Dissolution of Marriage so that it is not recorded) Will the sales agreement be an “As Is” sales contract or will there be a “Repairs Clause” and who will pay for said repairs? What condition does the property need to be maintained in throughout the sales process? How often must the spouse living in the property make the property available for showings and upon how much notice? Will there be open houses and will there be a lock box? Does the judge have the power to appoint a person to sign on behalf of a spouse that does not follow the terms of the MSA to execute the listing agreement, sales agreement, and closing documents? Will the judge have the power to enter an order transferring the property if one party refuses to execute the Deed?
Is the real property facing foreclosure:
The basic questions surrounding who signed the note become even more detailed when the property is facing foreclosure. The requirements to force a sale are not enough. The short sale process requires that any party that signed the note provide financial information such as tax returns, pay stubs, and bank statements. Further, the parties will have to submit a hardship letter and an application for the Short sale. It is also important to remember that these documents expire every 90 days and that the parties will have to submit updated financials if the short sale process takes more than 90 days. Finally, once the short sale has been submitted to an underwriter for review there is a very high likelihood that the underwriter will request additional documents. Those documents generally have to be submitted within 48 hours.
The MSA also needs to cover who will pay for the cost of hiring an attorney to defend the foreclosure and if the property cannot be sold as a short sale then what terms the parties will agree to, if any, in a judgment. Many foreclosures can be finalized with a waiver of deficiency. Please note that both the waiver of deficiency and a short sale have a tax consequence. The bank will issue a 1099 to all parties that signed the note. Who will be responsible for this tax obligation? Is the tax obligation the same for both parties? Remember that at best this is only the homestead for one of the parties. Finally, who is responsible for the deficiency judgment, if any? The judgment will be joint and several and hold harmless language will only be enforceable against collectable assets.
Is a refinance or loan modification realistic:
Many MSA’s call for the receiving party to refinance the property or get a loan modification within a certain number of months or years. Rules regarding refinancing of properties regularly change. It is however very rare that a refinance to “remove” a party from the note will occur unless the property has an 80% loan to value ratio. If it is not realistic to achieve this ratio within the time limits then the defense of impossibility is being written into the MSA. This is not an outcome most clients will accept. Loan modifications and refinances are both based on property value and income of the person requesting the modification or refinance. Make sure that this is a property that will qualify and that the person making the request will qualify before exposing your clients to a provision in a MSA that cannot be fulfilled.
It is important to remember that once the quit claim deed has been recorded the grantor has lost control over the property and that they only have the rights listed in the MSA. Make sure that the real property provisions of the MSA are specifically binding on the heirs and assigns of the Grantee. If both parties signed the note then the death of the receiving spouse does not alleviate the obligation on the note for the remaining spouse even though that person executed a quit claim deed. Before death the spouse that received the property may have fulfilled the terms and conditions of the MSA and paid the note timely. It is unlikely that the heirs of the deceased spouse will be motivated to or have the means to continue to maintain the obligations associated with the property. It is therefore important to make provisions for the untimely death of the receiving spouse as long as the grantor remains liable on the note.