What is a due on sale clause? Kiritsis Law Group 212 922 0005

May 13, 2021

By: John Kiritsis, Esq., CPA, MBA, MS, JD, LL.M

Generally, it refers to a deed of trust clause, that permits the noteholder to call the loan immediately due and payable upon a sale or conveyance of the property, and thus making the loan non-assumable. It is important to keep in mind, that a due on sale clause gives the lender the right but not the obligation to call the loan. This may provide a borrower with the possibility of conveying the property, with the hopes of the lender failing to notice and/or disregard the conveyance. However, this author believes that this is an increasingly risky proposition. The rise of electronic filing and easier access to public records, are making it easier for lender to spot conveyances. Also, the 2008 financial crisis exposed many liquidity problems, in the lending industry that could cause lenders to exercise their rights under the due on sale clauses. This risk only compounded when factoring the many loans involving real property, span over long time periods. Also, if there is a fall out among the parties, then it is possible that the situation leads to tax controversies over who reports what and on which tax form.

 

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