Mortgage on Your Property? 3 Takeaways from a Recent Court Decision.
Owning real estate is a documented way to increase personal wealth and encourage generational financial stability. This is likely why owning real estate is still considered by many to be part of the “American Dream.” Most people and institutions, however, do not own their property “outright”—or without any existing lender interest. Instead, financing through a bank or other financial institution is more common.
A recent Virginia Court of Appeals decision, Primis Bank v. Mahaley, highlights the nuances and complications that can arise when liens encumber a property. In Primis, property owners secured a business loan with a deed of trust on their Arlington, Virginia, property (in addition to other financing). The property owners then modified the initial deed of trust, eventually recording the modification, but subsequently failed to make the required payments. The property owners then sold the Arlington site to a new property owner (Mr. Mahaley), who also used financing to purchase the property. The prior owners used the proceeds to pay two other lenders; however did not pay the remaining lender (Primis). Mr. Mahaley was unaware of the Primis deed of trust.
When Mr. Mahley learned about the Primis deed of trust (and their decision to foreclose on the property due to nonpayment), he sued to release the lien and to obtain an injunction to stop the foreclosure. The Court of Appeals reversed the trial court on several of its pretrial and trial-related rulings. I recommend that future and current real estate owners keep in mind the following points emphasized by the Court:
Deeds of Trust are Effective on the Date of Execution (as opposed to recordation).
The Court of Appeals rejected Mr. Mahaley’s argument that the Deed of Trust modification was not effective until recorded (pursuant to Virginia’s recordation statute). The Court found that the Deed of Trust (and its obligations) were effective once agreed to/signed. I recommend that borrowers review and understand the language of any deed of trust, as it will be effective as soon as it is signed.
Certificates of satisfaction are not required in cases of loan modification.
The Court disagreed with Mr. Mahaley’s contention that Primis needed to file a certificate of satisfaction for the original deed of trust (pursuant to Va. Code 55.1-339(B)(1), noting that the applicable loan was modified—and therefore did not need to be reflected as satisfied. I recommend that potential purchasers review deed of trust modifications closely to understand the status of existing encumbrances on a property. I also recommend that parties verify that paid-off loans are addressed with a certificate of satisfaction (to ensure that the chain of title and their obligations are clear).
Failure to review a title examination can be very costly and difficult to overturn.
In Primis, Mr. Mahley argued that his “ordinary negligence” in failing to review the title examination when he brought the Arlington property warranted the equitable relief of subrogation—or the taking the place of a creditor in the change of title. He argued that he was unaware of the existence of the Primis Deed of Trust because of a defective title search. The Court held that subrogation was inapplicable to the instant case, given the strict standard placed on receiving equitable relief. I recommend that potential buyers pursue a thorough title report and review the existence of any liens prior to closing (or risk having any obligations passed to them).
Theodora Stringham focuses her practice on bringing solutions-oriented representation and zealous advocacy to complex issues impacting individuals, organizations, and businesses. Ms. Stringham seeks to understand clients’ concerns and provide thorough and strategic options aimed at achieving their goals. She has been recognized for her work in the Real Estate, Labor and Employment, and Commercial Litigation practice areas, providing counseling and litigation support for a wide variety of Real Estate and Labor and Employment concerns.