A Deed of Trust in California can be used to secure contract obligations other payment of money. Usually, the primary obligation secured is the repayment of the loan. There are ancillary duties usually set out in the deed of trust, such as keeping the property in good repair, maintaining insurance, etc. However, in some cases the other obligations may be a primary secured obligation. Enforcement, by judicial foreclosure or nonjudicial trustee’s sale, essentially provides a dollars remedy through a foreclosure sale. Thus, the obligation being secured must be capable of liquidation (i.e. determining a specific monetary value) before enforcement. The contract may include a liquidated damages provision, which specifies how to calculate that monetary value. Whether a liquidated damages clause is enforceable is not always clear, and interested parties may want to consult with a Sacramento real estate and business attorney for clarification. Otherwise, without liquidated damages, determining the amount of damages would likely require a judicial foreclosure, in which monetary damages will be determined.
A dilemma arises when the property owner pays off the loan, but has not yet completed full performance of other obligations secured by the deed of trust. Usually, on paying off the loan, the borrower wants the lender to record a reconveyance of the deed of trust, effectively removing the ‘lien’ from the record. However, courts have found that reconveyance was not required. Such was the case in Dieckmeyer v. Redevelopment Agency of the City of Huntington Beach, where the plaintiff bought a condo through an affordable housing program. The program included restrictions on household incomes, and on future buyers. The deed of trust securing the purchase loan stated that it secured repayment of the note, future advances or obligations of the borrower, and…
“[p]erformance of each and every obligation, covenant, promise or agreement of Trustor contained herein in the Loan Agreement between Beneficiary and Trustor … and in that certain Affordable Housing Agreement [the CC & R’s] currently recorded on the property….”
The owner wanted to prepay her loan, and have the City reconvey the deed of trust. The City refused, and the lawsuit followed.
The Court first noted that a mortgage or deed of trust is security “for the performance of an act.” (Civ. Code, § 2920, subd. (a).) While the obligation most often secured is payment of a note, it may also be performance of a contract. Partial performance of the obligation secured does not extinguish the lien. (Civ. Code, § 2912.) Here, if the note is paid in full, it would be part performance of the secured obligation. But the payment does not extinguish the security. The Deed of Trust remains as security for the owners other obligations under the loan agreement and CC&R’s. Thus, the deed of trust remained as security for performance after the loan was paid off.
The court unfortunately elected not to address language in the Trust Deed that stated the borrower was entitled to a reconveyance when “all sums secured hereby have been paid, ” as the plaintiff did not argue that “all sums” excluded non-monetary obligations. This language provides a borrower with the argument that “all sums” means money, and does not include obeying the CC&Rs and the loan agreement.
A performance deed of trust may be difficult to foreclose non-judicially – that is, by trustee’s sale through the power of sale. A hesitant title company would refuse to perform the sale, especially if the borrower disputes the performance breach. The lender/holder of the deed of trust (the beneficiary) could substitute themselves in as trustee, and conduct the sale. However, If the beneficiary buys the property at the sale (in the event that there are no sufficient bidders), the borrower – mortgagor would have the right to redeem the property, getting it back by full performance of his obligation. (Copsey v. Sacramento Bank (1901) 133 Cal. 659).