HOW TO Successfully Prepare and Record a Deed in New York: Part 2-No Consideration Deed Transfers
By Erin A. Sidaras on August 22, 2016
On July 11, 2016, I began a short blog series on how to successfully prepare and record a deed in New York State. In that post, we reviewed the various types of deeds available such as warranty deeds, bargain and sale deeds and executors deeds. We also discussed the importance of securing a copy of the last deed of record and ensuring that when preparing a new deed, you do not deviate from name spellings and owner capacities, such as tenants by the entirety, joint tenants and tenants in common. The newly prepared deed should reflect the name of the owner/seller as it exactly appears, and in the capacity that the owner/seller received title to the property.
Given that my practice areas are land use development and transactional real estate, today’s post will discuss deed transfers where no consideration is paid by the buyer. You may have occasion to provide no consideration deed transfer preparation when, for example,, clients are transferring a real estate asset from their individual capacity to a corporate or LLC capacity. In other words, the seller is not receiving any money for the transfer because in most instances, the seller is retaining some beneficial ownership in the property. For instance, if John Smith is transferring a real estate asset to No # Main Street LLC, where John Smith is the sole member of the LLC; No # Main Street LLC may elect not to pay any money for the real estate asset because the transfer is done for liability purposes, and John Smith will continue to remain in possession and control of the asset. Similar types of no consideration transfers are also popular when a marital asset is being transferred as the result of a divorce or newly married couple.
The examples set forth above are usually undertaken in good faith and with the intent to manage a real estate asset in the manner desired by the owner/seller. However, attorneys should be careful to ask the right questions to determine the owner/seller’s actual intent in transferring a real estate asset, because no consideration transfers can raise additional title insurance exceptions in the future. Likewise, no consideration deed transfers can bring unwanted liability, such as existing judgments and liens, upon the new owner and potential state and federal tax consequences to both the seller and no consideration buyer.
So how does a real estate practitioner properly transfer an asset for no consideration, while at the same time, ensuring that the parties involved are protected from any negative consequences? The answer is simple; due diligence and disclosure. The reasons are abundant as to why It is not sufficient to secure a copy of the existing deed and then simply prepare a new deed. First, when a real estate asset is transferred for no consideration, the existing judgments, liens and mortgages transfer with the asset. Although the new buyer does not become personally liable for the debts, the new buyer cannot transfer the asset without paying off the debts. In the example above, assume that John Smith transferred his real estate asset to No # Main Street LLC, but John Smith failed to advise his attorney that he has a number of judgments and liens against him. Because the transfer is for no consideration, the judgments and liens against John Smith will continue to run with the land. Now, assume that John Smith is not the only member of No # Main Street LLC, but instead, John Smith has a partner, Mary Jones, who has no idea that John Smith has existing debts. Those debts will now potentially affect Mary Jones’ interest in the real estate asset owned by No # Main Street LLC.
In addition, no consideration deed transfers raise questions with respect to the intent of the seller. In the above example, perhaps John Smith intended to transfer the real estate asset in an attempt to avoid his existing creditors. Because No # Main Street LLC did not pay any consideration for the transfer, a title exception will be raised when No # Main Street LLC sells the asset requiring proof that John Smith did not transfer the asset to avoid the existing creditors. If No # Main Street LLC had paid value for the asset, it is less likely that a title insurance exception would be raised.
Other impacts of no consideration
deed transfers include acceleration of existing mortgages. Most
mortgages contain an acceleration provision if the asset is transferred
to someone other than the mortgage borrower. Although in practice it is
less likely that the lender will accelerate a mortgage that is not in
default, nonetheless, the no consideration parties to the deed must be
advised that this risk exists. Likewise, when transferring real estate assets that arise from a divorce or a new marriage, the attorney preparer should take care to determine whether value is actually being paid or received for the transfer. If John and Mary get divorced, and as part of his settlement, Mary transfers her interest in the real estate asset to John, that asset should be valued; and, unless it is specifically defined otherwise, consideration should be paid on the value of Mary’s one-half interest in the asset. This is where accountants and tax attorneys should be consulted, to ensure that negative tax consequences do not arise from the no consideration transfer.
Finally, the way to avoid the pitfalls discussed above is to secure, at a minimum, a real estate asset last owner with judgment and lien search from your preferred title insurance provider. Review the report to determine whether a no consideration deed transfer will raise more questions than it might solve. Also, discuss the intentions of all parties to a no consideration deed transfer, as negative consequences can arise for all parties involved.
===============================HOW TO Successfully Prepare and Record a Deed in New York: The Do’s and Don’ts, Part One
By Erin A. Sidaras on July 11, 2016
As any New York State attorney would most likely agree, ownership and title to real property can play an integral role in the practice of not only transactional real estate law, but also, land use development (our specialty area), matrimonial law, trusts and estates law, elder law, corporate law, and numerous other practice areas. In fact, no matter what your practice area is, it is quite likely that you will routinely be called upon to review a deed, transfer a real estate asset, set up a trust or life estate, confirm ownership or simply review a deed to insure it accurately reflects the property owners, the property owners’ interests and identifies the correct property as stated on the deed.
Although this sounds simple enough, from my experience, many an attorney has not only improperly prepared a deed, but also, he has encountered multiple hurdles in successfully recording a deed. Suffice it to say that prior to becoming a member of the Bar, my career began in the Title Insurance Industry, which by all accounts provides me with some insider expertise to share with you today! The Do’s and Dont’s to successfully drafting and recording a deed will greatly exceed the attention span of a single blog post. As such, continue to read our weekly post’s for additional do’s and dont’s tips. For today, we start at the beginning: How to prepare a deed insuring that the seller (grantor) and purchaser (grantee) are properly reflected.
In New York State, there are multiple kinds of deeds, but in general, those most commonly used to transfer title are Warranty Deeds, Bargain and Sale Deeds without Covenants, Bargain and Sale Deeds with Covenants and Quitclaim Deeds. Prior to the advent of title insurance, the type of deed carried specific warranties which protected a purchaser from claims against their ownership. Given that title insurance is common practice today, the type of deed is less significant, and under most circumstances a Bargain and Sale Deed with Covenants is the generally preferred deed type. However, this rule is not always preferred, particularly if the real estate transfer is undertaken for estate planning purposes, is the result of a death, involves a no consideration transfer between husband and wife or relatives or related business entities. Further blog posts will address these exceptions. For today, Don’t Number 1– when asked to transfer a real estate asset, do not assume that your client owns the property! It is incumbent upon an attorney to secure a copy of the last deed of record from the County Clerk’s Office or City Register’s office. Only after the last deed of record has been produced and reviewed with the client should the process of drafting a new deed begin.
Don’t Number 2– when preparing the deed, do not deviate from the proper names on the last deed of record or deviate from the legal property description. If the owner’s name on the deed is Mary S. Smith and Mary is transferring to John J. Jones, do not drop Mary’s middle initial. Likewise, if Mary S. Smith is now known as Mary S. Adams, the deed should be prepared as such: “Mary S. Smith, now known as Mary S. Adams.” The deed drafter must take care to insure that the chain of title accurately reflects ownership interests. If the drafter were to prepare the deed with Mary S. Adams as the owner, because that is what Mary S. Adams advised the drafter, the deed would contain a defect causing potential problems for future buyers and sellers.
Similar to the types of deeds available for use in New York, there are multiple types of interests that a seller or buyer can utilize when purchasing property. Title to real estate is held typically in one of three ways: (1) Tenants by the Entirety, reserved only to married persons; (2) Joint Tenants, reserved to persons who hold equal shares of the real estate asset, with rights of survivorship; and (3) Tenants in Common, reserved to persons and business entities holding fractional ownership interests, with no rights of survivorship.
Do Number 1– ask a lot of questions. Although deed preparation is typically assigned to the seller/grantor, if you represent the buyer/grantee, be sure that your clients understand their ownership interests. Not every married couple prefers to hold title as tenants by the entirety. There may be financial concerns, prior marital commitments or some other personal reason why a married couple would not want to hold title to real property as tenants by the entirety.
Do Number 2– if the property is owned by any number of business organizations such as Limited Liability Companies, Joint Ventures or Limited Partnerships, insure that all interests are accounted for and that no fractional share of the real estate asset has already been transferred, sold or conveyed. Likewise, insure that the the person signing the deed has capacity to transfer the asset.
And to wrap up this first blog post respecting the Do’s and Don’t of deed preparation, for those of you practicing in the world of land use, take a minute to secure the last deed of record before you make a land development application to a municipality or government agency. Many times your client is not the property owner, but instead, your client may be the tenant, co-tenant or sub-lessee/or. Only the actual landowner has capacity to make a land development application, as such, stay one step ahead of the curve and insure that your client is the real estate asset owner, and if not, secure the property owner’s consent before you begin the process.