Trust Deed

November 1, 2025 resources, Trust Deed No Comments

The Trust Deed -characteristics, provisions, enforcement mechanisms, and alternative security arrangements related to the document used to impose a lien on real estate.

Trust Deed Fundamentals and Legal Nature

The trust deed is the preferred security device used to impose a voluntary lien (a mortgage) on real estate to secure a debt evidenced by a promissory note. Although the promissory note and the trust deed are separate documents, they are considered one contract and must be read together.

Parties and Roles

The trust deed arrangement involves three distinct parties:

1. Trustor: The property owner/borrower who voluntarily encumbers their interest in the real estate with the lien.

2. Trustee (on a mortgage): The neutral third party who theoretically holds title and possesses the power-of-sale provision.

The trustee’s primary responsibilities are to sell the property at a public auction if instructed by the beneficiary or to reconveyance title and release the lien once the debt is fully repaid.

The trustee acts as a common agent governed by strict statutory foreclosure procedures.

3. Beneficiary: The lender or carryback seller who holds the security interest (the lien) in the property.

The trust deed ceases to exist when its purpose ends, either through foreclosure, full repayment and reconveyance, or by mutual agreement using a deed-in-lieu of foreclosure.

Contract Provisions and Limitations

Trust deeds are generally viewed as adhesion contracts because the mortgage holder (lender) typically has superior bargaining power over the borrower

Consequently, California law restricts the strict enforcement of many provisions, limiting the mortgage holder’s actions to those reasonably necessary to protect the value of their security interest.

Key provisions found in a modern trust deed include:

• Condition of Property: Obligates the owner to maintain the property to avoid waste or impairment of the security interest.

• Future Advances Clause: Authorizes the mortgage holder to advance funds (e.g., for taxes, insurance, or defense of the security) and add those amounts to the secured debt.

• Assignment of Rents: Creates a security interest in rents generated by the property.

• Acceleration and Power of Sale: Permits the mortgage holder to demand immediate repayment of all sums due upon default and authorizes the trustee to initiate a nonjudicial foreclosure sale.

• Due-on-Sale (Alienation Clause): Allows the mortgage holder to call the entire debt due if the owner transfers any interest in the property.

Specific Provisions and Security Issues

• Impound Accounts : An impound account provision establishes a reserve of the owner’s funds to pay annually recurring ownership expenses, such as property taxes and insurance premiums (TI), thereby safeguarding the mortgage holder’s security interest.

• Assignment of Rents : The assignment of rents provision creates a lien on unpaid rents as additional security.

For trust deeds recorded after 1996, enforcement of this lien upon default does not constitute an “action” that triggers the one-action rule.

Once recorded, the assignment is fully perfected, giving constructive notice of the mortgage holder’s interest in the rents.

• Beneficiary Statements and Payoff Demands : Mortgage holders provide either a beneficiary statement (details the condition of the debt) or a payoff demand (the exact amount needed to fully satisfy and reconvey the mortgage) when requested by an entitled person.

Any amount omitted from an unconditional payoff demand remains an unsecured debt owed by the original borrower.

• Grant Deed as a Mortgage : A grant deed given by an owner solely to secure a debt is recharacterized as a mortgage-in-fact (a lien), not a true transfer of ownership.

This arrangement is risky for lenders because, lacking a power-of-sale provision, they must pursue the less efficient judicial foreclosure to exhaust the owner’s right of redemption.

Transfers, Defaults, and Additional Security

• Equity Purchase and Due-on-Sale: The due-on clause allows the mortgage holder to accelerate the debt upon the transfer of any interest in the secured property, unless specific intra-family or other regulatory exemptions apply.

Transfers structured using alternative financing devices, such as a land sales contract or a lease-option sale, are deemed a transfer of an interest and trigger the due-on clause.

A waiver agreement can be negotiated to prevent a call or recast of the loan terms.

• Assumptions : A buyer can take over a mortgage via formal assumption (with mortgage holder approval) or a subject-to transaction (taking title subject to the mortgage without formal agreement).

A novation is a three-party agreement that releases the original seller from liability upon assumption by the buyer.

• Personal Property as Security : When a debt is secured by both real estate and personal property (mixed collateral transaction), the real estate is secured by a trust deed. The personal property is secured by a separate security agreement.

To provide public notice and establish priority, a UCC-1 Financing Statement must be prepared and filed to perfect the lien on the personal property.