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:
- land sales contracts [See RPI Form 168];
- lease-option sales [See RPI Form 163]; or
- all-inclusive trust deeds (AITDs). [See RPI Form 421]
For example, a land sales contract
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]