This is the second episode in our new series dramatizing lender interference under the due-on clause in a trust deed during periods of rising interest rates. The prior episode introduces the due-on clause in economic recessions and recoveries.

This episode brings to vivid life the most common event triggering the mortgage holder’s due-on clause.

The next episode covers the triggering of the due-on clause in a trust deed on entry into a lease with a term over three years, or for any term coupled with an option to buy.

Primary event triggering the mortgage holder’s exercise of the due-on clause

As previously discussed, in times of steadily rising interest rates, mortgage holders jump on any event triggering the due-on clause their trust deed to call or recast the mortgage debt evidenced by the note in order to increase earnings on their portfolio.  The due-on clause is technically called an alienation clause in real estate and in contract law.

Due-on clauses are most commonly known as due-on-sale clauses. However, “due-on clause” is a more accurate term. A sale is not the only event triggering the clause.

However, as the name “due-on-sale” suggests, the usual event triggering the mortgage holder’s due-on clause is a sale of property encumbered by a mortgage holder’s trust deed containing a due-on clause. When this occurs, the due-on clause has been irreversibly triggered, and the mortgage holder fast interferes to pick up additional profit.

The due-on clause is triggered not only by a transfer using a grant deed or quitclaim deed, but by any method for transfer of any legal or equitable ownership in the real estate interest encumbered by the trust deed. [See RPI Form 404 and 405]

Examples of sales with seller financing other than a standard carryback trust deed include wraparound carryback security devices such as:

For example, a land sales contract

does not involve a conveyance of title to real estate to the buyer by deed until the price is fully paid by the buyer. The seller retains title not as the owner but as security for the carryback debt owed by the buyer. However, the buyer under a land sales contract becomes the equitable owner of the property as soon as the land sales contract is entered into and possession is transferred.

Here, this structuring of a carryback sale triggers the due-on clause in any existing trust deed encumbrance on the property interest sold, whether or not any documents are recorded. [Tucker v. Lassen Savings and Loan Association (1974) 12 C3d 629]