ALERT: Issue: Does A Deed In Lieu of Foreclosure Have Any Different Legal Effect Than A Warranty Deed?

The Texas Supreme Court has stated that there is no such deed as a "deed in lieu" and that such an instrument is in fact a warranty deed with the consideration being the cancellation of debt. See Flag-Redfern Oil Co. v. Humble Exploration, Inc., 744 S.W. 2d 6 (Tex. 1987). The court specifically stated that the deed in lieu did not operate as a foreclosure cutting off subsequent title transfers or encumbrances, but said that the deed was given subject to all matters subsequently created, as would a deed given in a sale transaction. However, there is no specific discussion by the court that such a deed is given any different effect than a deed given for the sale or other transfer of property.

The court's holding that a deed given in lieu of a foreclosure is the same as a warranty deed and that the deed in lieu in question is construed to have the same effect as a normal deed would seem to support the position that there is no legal difference between a deed given in a sale or other transaction, and a deed given in lieu of a foreclosure.

There is one thing, however, that should be noted that distinguishes the deed in lieu. The holder of a debt under a deed of trust who accepts a deed in lieu from the debtor may void that deed in lieu before the fourth anniversary of the deed's execution and foreclosure under the original trust deed if there is an undisclosed lien or encumbrance on the property of which the holder had no personal knowledge. Tex. Prop. Code Ann. Sec.51.006(b)(1), (2).