New York Case Challenges Enforceability of “Deed in a Box” Delivered in Connection with a Forbearance Agreement

A recent opinion by Justice Andrea Masley of New York County Supreme Court (Commercial Division) has meaningful implications for how lenders may consider structuring forbearance arrangements involving New York City real property. In Shanghai Commercial Bank Ltd. v. New Tent, LLC, the lender commenced suit against borrowers for breach of a Forbearance Agreement in connection with a $34 million loan secured by real property in midtown Manhattan, entered into following borrower’s default of the loan.

Under the Forbearance Agreement, the lender agreed to forbear from exercising its remedies (i.e. foreclose), in exchange for the borrower’s delivery of a “Bill of Sale in Lieu of Foreclosure”, which would convey the property to the lender as an “absolute transfer,” not intended as a mortgage or security instrument of any kind. Following borrower’s failure to meet the forbearance conditions, the lender moved for summary judgment to enforce the deed in lieu of foreclosure. Real Property Law (RPL) § 320 provides that a deed which “appears to be intended only as a security in the nature of a mortgage” must be treated as a mortgage, regardless of the language used in the instrument. Despite the borrower’s failure to raise § 320 in their original opposition (which the court characterized as a strategic omission rather than inadvertence), Justice Masley granted re-argument and vacated the order.

Justice Masley held that a deed in lieu of foreclosure delivered in connection with a forbearance agreement must be treated as a mortgage under § 320, meaning the lender could not record the deed to take absolute title to the property. Instead, the lender would need to proceed in the same manner as any other mortgage; by the full judicial foreclosure and sale proceeding. The so-called “deed in a box,” a pre-signed deed in lieu of foreclosure held in escrow and released upon a further default under a forbearance agreement or under certain other conditions, has been used in  commercial loan workouts because of its ability for a potentially fast, court-free path to title. The ruling, although on appeal, creates more uncertainty in New York for this specific workout tool, but it does not rule out all court-free paths to title.

By contrast, a contemporaneous deed in lieu of foreclosure remains enforceable in situations where it is delivered as part of a negotiated settlement that resolves the underlying indebtedness, eliminating any continuing borrower-lender relationship. In this situation, the deed operates as a complete settlement of the mortgage debt rather than as additional security for a loan that remains outstanding, thereby never triggering RPL § 320.