What is an alienation clause? Show
How is it used in real estate transactions and mortgages? How does it work in simple terms? We will look at what is an alienation clause, look at its definition and meaning, how it is relevant in real estate, look at its enforcement and enforcement exceptions, compare it to an acceleration clause and an assumable mortgage, look at examples and more!
We are so excited to begin!! Are you ready? Let’s get right into it…
What is an alienation clauseAn alienation clause (also known as the due-on-sale clause, non-alienation clause or anti-alienation clause) is typically found in loan agreements, mortgages, deeds of trust or insurance contracts whereby the lender has the right to request the repayment for the outstanding balance of the loan in certain events. In other words, if a person borrowed money from the bank to purchase a house and still has a financial obligation under the loan contract to pay principal and interest, the full balance of the sums borrowed will become immediately due and payable on a future sale. In the context of a real estate transaction, the borrower must pay the remaining balance on the mortgage to transfer title to the property. For example:
The objective of the alienation clause is to:
The due-on-sale clause produces legal effects whether the transfer of property by one party was voluntary or involuntary. Alienation clause definitionTo define alienation clause, let’s first see what the term “alienation” means. According to the Merriam-Webster dictionary, the term alienationmeans:
Alienation real estate is the act of selling, transferring or conveying title to a property. Now, let’s look at the definition of alienation clause. According to Century 21, an alienation clause is defined as:
Alienation clause real estate is a contractual provision prohibiting the borrower from assigning the real estate mortgage or debt to someone else and giving the lender the right to call back the loan in the event of a sale. Alienation clause in real estateIn nearly all of the mortgage agreements today, it is standard for lenders to include an alienation provision. It is unlikely that a lender assumes the risk of having a borrower transfer the deed of mortgage to someone else without the lender’s approval. In the context of the alienation of property, the “alienation clause” protects the lender (bank, financial institution, creditor, financing company or any other type of lender) in the following manner:
How does the alienation clause work practically speaking? Simply said, due to the legal prohibition imposed on the borrower to sell, transfer or assign the mortgage on the date of the sale, if a property owner wishes to transfer title to the property (alienate property), he or she must pay off the bank on the date of the closing. Typically, the seller will use the sale proceeds to pay off the bank loan before the title is transferred to the buyer. Alienation clause enforcementAlienation provisions are generally enforceable. A lender can choose to enforce the alienation right or not. However, in most cases, you should expect lenders to enforce their contractual rights to ensure they are protected and prevent financial losses. There are some enforcement exceptions when a mortgage, loan contract or deed of financing can be transferred by the borrower to someone else without triggering the alienation clause in mortgage. Typically, you can expect to be able to transfer or assign your mortgage without having to pay off the debt in the following circumstances:
The Garn-St. Germain Depository Institutions Regulations Act of 1982 provides outlines certain exceptions to the enforcement of an alienation clause. It’s essential to verify your right of alienation under the contract before you make any decisions that may result in the unintended trigger of the alienation clause. Alienation clause vs acceleration clauseAn alienation clause is a type of clause typically found in contracts where one party may have a financial obligation towards another such as a loan, mortgage or other financial contracts. The purpose is to ensure that a contracting party fulfills their financial obligations in full before having the right to alienate a property or assigng the contract. Also known as due-on-sale clauses, they are standard in mortgages. Such mortgage alienation clauses are found in residential or commercial property loans or financing agreements. They ensure that the lender’s money will be fully paid in the event the real estate property is sold or if the borrower intends to transfer title to a third-party. An acceleration clause is similar to an alienation clause whereby the lender can demand the debt’s full repayment. Although you’ll need to see the specific terms of your acceleration clause, typically, when a borrower misses loan payments or defaults under the loan contract, the lender can demand the reimbursement of the debt, partially or in full, by a certain date. Triggering the acceleration clause often leads to the lender attempting to foreclose the property. The acceleration clause can be exercised in the lender’s discretion when the borrower defaults under the loan contract such as:
The term “acceleration” refers to the loan obligation becoming due prior to what was agreed under the loan contract. At the end of the day, an alienation clause is a form of “acceleration” of the debt obligations as all of the debt becomes payable on the closing date of a property or contract transfer date. In other words, if you sell your home where you still have an unpaid balance on your home loan, your lender will demand to ask for the immediate and full payment of the home loan before the title of your home is transferred to the buyer. Assumable mortgageIn some cases, a loan contract or mortgage will not have an alienation clause. In other words, the borrower is not restricted or prohibited from transferring the loan contract to someone else when there is an alienation of title. A mortgage without an alienation clause is called an “assumable mortgage”. With an assumable mortgage, the property owner can transfer the mortgage to the buyer and sell or assign the title to the property without fully reimbursing the loan creditor. From the moment the mortgage is transferred to the buyer, he or she will become responsible to make the ongoing mortgage payments to the lender. For example:
With an assumable mortgage, a person can transfer the mortgage to another person. In this case, the buyer will:
Alienation clause exampleLet’s look at a few alienation clause examples to see how they are presented in contracts. Example 1: Anti-alienation clause
Example 2: Alienation clause promissory note
Alienation clause FAQWhat is alienation in real estateAn alienation provision or due-on-sale provision is a contractual language obligating a party (the borrower) to fully execute their financial obligations towards the other party (the lender) before the contract or underlying property can be sold or transferred. The ultimate beneficiary of the due-on-sale provision is the lender. In essence, the lender ensures that the borrower’s debt is settled before the contract is alienated. When a real estate mortgage contract does not have an alienation clause, we consider that contract to be an assumable mortgage contract. In other words, the borrower (mortgagor) has the right to transfer and assign the deed of mortgage to a third party (new mortgagor) who will “assume” or continue the initial mortgagor’s obligation in favour of the lender (mortgagee). What is an alienation clause in a leaseAn alienation clause in a lease contract works the same way as in a mortgage contract. In the event of the alienation or transfer of the lease, the tenant agrees to execute its financial obligations in favour of the landlord. For instance, the landlord may lend money to the tenant for leasehold improvements and include the repayment of this debt in the monthly rentals. Should the tenant wish to terminate the lease or transfer it, the landlord can demand the full reimbursement of the borrowed sums. Articles Recommended For You!
Editorial Staff Hello Nation! I'm a lawyer by trade and an entrepreneur by spirit. I specialize in law, business, marketing, and technology (and love it!). I'm an expert SEO and content marketer where I deeply enjoy writing content in highly competitive fields. On this blog, I share my experiences, knowledge, and provide you with golden nuggets of useful information. Enjoy! What is the clause in a note that makes the entire loan balance due upon default?In a mortgage contract, an "acceleration clause" is a provision that permits the lender to demand that the borrower repay the entire loan after a default. An "acceleration clause" in a mortgage or deed of trust allows the lender, or current loan holder, to demand repayment in full if the borrower defaults on the loan.
What is an acceleration clause in a loan?An accelerated clause is a term in a loan agreement that requires the borrower to pay off the loan immediately under certain conditions. An accelerated clause is typically invoked when the borrower materially breaches the loan agreement.
What is another name for dueDue-on-sale clauses – also called alienation clauses – are a type of acceleration clause. Similar to due-on-sale clauses, acceleration clauses allow your mortgage lender to demand full repayment of your home loan.
What is a partial release clause?Key Takeaways
A partial release is a mortgage provision that allows some of the collateral to be released from a mortgage after the borrower pays a certain amount of the loan. Lenders require proof of payment, a survey map, appraisal, and a letter outlining the reason for the partial release.
|