What it means
A conveyance is the legal act of passing ownership of property, usually real estate, from one person to another. It is called voluntary when the owner chooses to do it, as opposed to losing the property through a forced sale.
The two main settings are lending and gifting or transfers between related parties. In a lending context, a borrower who cannot keep up repayments may offer the property to the lender and ask to be released from the mortgage.
The lender may accept because it avoids the time and cost of foreclosure. The borrower avoids a public court process, though credit consequences still follow.
In the second setting, an owner transfers property without receiving fair value in return, for instance to a relative. If the owner was in debt at the time, creditors may argue the transfer was made to put assets out of their reach, and a court can set it aside.
This is why advisers treat transfers made without payment with caution when debts exist. Lenders are not obliged to accept a voluntary conveyance.
They typically require that the property has no other liens, such as second mortgages or unpaid tax charges, because those would stay attached to the title. They will also compare the likely recovery against the alternative of foreclosure.
Whether the borrower stays liable for any shortfall depends on the agreement and local law. Some lenders release the borrower entirely, while others reserve the right to pursue the difference between the debt and the property's value.
It should be written into the agreement. Both sides should get legal and tax advice.
The transfer can have tax consequences for the borrower, and the lender must account for the property it receives and its carrying costs.
In practice
Real-world examples.
Example
A small landlord can no longer afford payments on a rental flat after losing two tenants. She offers the flat to the bank in exchange for release from the mortgage. The bank accepts because the flat has no other debts against it.
Example
A restaurant owner with unpaid supplier invoices transfers his house to his brother for nothing. A supplier later sues, and the court sets the transfer aside, because it was made without payment while the debts existed.
Example
A property developer facing a short-term cash squeeze negotiates a transfer of an unfinished building to its lender. Both sides agree a release of the loan, and the lender completes the project and sells it.
Formula
Calculation
Lender's saving = Net recovery by voluntary conveyance - Net recovery by foreclosure
A borrower owes $300,000 on a property now worth $270,000. Foreclosure would cost the lender $30,000 in legal fees, delays and upkeep, giving a net recovery of $270,000 - $30,000 = $240,000. A voluntary conveyance would cost only $8,000, giving a net recovery of $270,000 - $8,000 = $262,000. The lender's saving is $262,000 - $240,000 = $22,000, which explains why many lenders prefer this route.Case study
Seen in the real world.
Ashgrove Holdings is an illustrative, fictional company that owned a small office block with a $1,200,000 mortgage. After its main tenant left, the building was valued at $1,000,000, and the company could not meet the repayments.
The bank estimated that a foreclosure would cost about $150,000 and take over a year. It agreed instead to a voluntary conveyance, accepting the building and releasing Ashgrove from further liability, after confirming there were no other liens.
Ashgrove avoided a court judgment for the $200,000 shortfall, and the bank recovered about $960,000 after $40,000 in costs. The fictional example shows how both parties can come out ahead compared with a contested foreclosure. Ashgrove's advisers insisted that the release be in writing and that it cover the full $1,200,000 debt, because a verbal assurance would have left the company exposed to a later claim. The company's directors also reviewed whether any personal guarantees existed, since those can survive a transfer unless they are expressly released.
Watch out
Common mistakes.
- Assuming that a voluntary conveyance automatically wipes out the whole debt, when any shortfall depends on what the agreement says.
- Transferring property to a relative for nothing while in debt, which creditors can challenge as a fraudulent transfer.
- Overlooking other liens on the property, which usually remain attached and can stop a lender accepting the transfer.
Questions
People also ask.
Is a voluntary conveyance the same as a deed in lieu of foreclosure?
In a lending context, yes, a deed in lieu is the usual form of a borrower voluntarily conveying property to the lender.
Does it affect my credit?
It usually does, though the impact is often considered milder than a full foreclosure, so it should be confirmed with the lender.
Can a lender refuse it?
Yes, the lender is not obliged to accept and will usually do so only if the numbers beat the cost of foreclosure.
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