By Jones Osborn II

Frequently a deed of trust against raw land will have what are known as "release provisions." These provisions allow the owner of the land to have portions of it released from the deed of trust as the debt is paid down.

Property owners who are about to default on a debt secured by land normally will take any releases to which they are entitled before defaulting. This has happened with increasing frequency over the last several years as the land market has collapsed. There is nothing legally improper with taking such releases on the eve of a default, and there is usually nothing the noteholder can do to prevent it. Nothing, that is, unless the property owner admits to the noteholder he is going to default. If that happens, the rules suddenly change, according to the Arizona Court of Appeals.

In a recent case, a property owner told the noteholder as a courtesy that he was going to default in a balloon payment that was due in several days. Shortly thereafter, he complied with all the requirements necessary to obtain a release, which included tendering a partial payment of the note and furnishing a legal description and survey. The noteholder then refused to grant the release, arguing, among other things, that the owner was not entitled to a release because he was in default. The default? Something called "anticipatory repudiation," which is a statement by a party to a contract that he intends to breach the contract in the future. When this happens, the courts say that the party has repudiated the contract and is therefore in breach of the contract as of the time he makes the statement. Because the deed of trust allowed releases only when there was no default, the owner lost his right to a release by telling the noteholder he was going to default. In other words, the property owner's honesty cost him his release.

Other Points. In this same decision, the Court issued a couple of other interesting rulings. The first is that release provisions must be complied with strictly and exactly. The Court held that a release request for 29.9897 acres was invalid where the deed of trust specified all releases must be at least 30 acres. The theory of "substantial performance," which is often applied to other contracts, does not apply when a release is requested. If you want a release, it is not enough to substantially comply with the requirements -- you must comply exactly.

The second is that a noteholder apparently may recover a personal judgment for attorneys' fees under a non-recourse note. Although this portion of the opinion is somewhat unclear, it seems to imply that because the attorneys' fees provision in the note did not itself contain a non-recourse limitation, the non-recourse nature of the note applies only to the obligation to pay principal and interest.

The Lessons. There are several valuable lessons we can learn from this decision.

1. If you want to obtain releases under a deed of trust, do not tell the noteholder you intend to default later.

2. If you own a note and the payor requests releases, ask him if he is going to default. If he says he is, refuse to grant the releases.

3. If you request a release, comply with all the requirements strictly, exactly, and on time.

4. If you are signing a non-recourse note, be sure the note specifically says you have no personal liability for attorneys' fees, costs, or any other amount payable by reason of the note or deed of trust.

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The decision referred to above is Aboud v. DeConcini, 115 Ariz. Adv. Rep. 51 (Ariz. App. 1992).