This is the final 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 covers avoiding due-on enforcement on the death of an owner of a one-to-four unit residential property encumbered by a consumer-purpose mortgage, and due-on divorce and inter-family transfer exceptions.

This episode illustrates negotiating a limitation or waiver of the existing mortgage holder’s due-on rights, and a mortgage holder’s waiver of their right to enforce the due-on clause by their conduct.

Lender waiver by negotiations

An owner wishing to enter into a transaction to sell, lease or further encumber real estate which is presently encumbered by a mortgage needs to first negotiate a limitation or waiver of the existing mortgage holder’s due-on rights. [See RPI Form 410]

Otherwise, expect the mortgage holder to call the loan – usually with a written notice to the owner composed in a cordial tone which masks its underlying intent to interfere.

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Think of it this way: waiver agreements are trade-offs. In return for waiving or agreeing to limit the exercise of its due-on rights in the future, the mortgage holder may demand valuable consideration such as:

  • additional points, like an origination;
  • additional security;
  • principal reduction;
  • increased interest;
  • a shorter due date; and
  • an assumption fee. [See RPI Form 410]

The waiver needs to be in writing to be enforceable against the mortgage holder. [12 Code of Federal Regulations §591.5(b)(4)]

Editor’s note – Expect stonewalling by the lender when negotiating a waiver agreement, as it is in to their financial benefit to stall when others are eager to close a deal. Some mortgage holders may simply call when the  owner has entered into an agreement to sell and the buyer now has an equity interest in the property when they hold an option to buy.

Consider a buyer who applies for a mortgage to purchase a residence they intend to occupy for only a few years. The buyer is concerned due-on enforcement will later make it more difficult to resell their property since interest rates are likely to continue to rise.

The buyer and lender negotiate the conditions on which a qualified buyer in a later sale of the property will be able to assume the buyer’s mortgage without a call by the mortgage holder.

In exchange, the buyer agrees to pay increased points or a higher interest rate, subject to applicable Reg Z fee caps.

Now, keep in mind the mortgage holder’s waiver of their due-on rights under an assumption agreement applies only to the present transfer to the buyer, and one future transfer to a qualified buyer.

Unless additionally agreed to, any other transfer of an interest in the property will trigger the due-on clause, allowing the mortgage holder to call or recast the mortgage again.

Lender waiver by conduct

In addition to a formal written waiver agreement, waiver of the mortgage holder’s due-on rights may occur by conduct when the mortgage holder fails to promptly enforce its due-on rights. [See RPI Form 410]

For example, consider a buyer who purchases real estate subject to a mortgage containing a due-on clause.

The mortgage holder discovers the transfer and promptly calls the mortgage.

But the mortgage holder then behaves strangely. They accept payments from the buyer for several months, a period longer than a reasonable time to enforce a call by foreclosure when the principal is not paid in full.

After interest rates increase, the mortgage holder then starts foreclosure to enforce their prior call by refusing further payments.

Can the mortgage holder, after accepting payments from the borrower following their discovery of the transfer or any call for payment of a lump sum payoff, later attempt to call or foreclosure?


Here, the mortgage holder waived the right to enforce their due-on clause by their conduct. [Rubin v. Los Angeles Federal Savings and Loan Association (1984) 159 CA3d 292]

After discovery of the transfer or calling the loan they accepted payments which is inconsistent with enforcing the due-on clause.  The mortgage holder may not later foreclose to enforce a call as they waived that right by continuing to accept payments long before or after the call.

Broker liability when masking the change of ownership

When the seller intends to transfer ownership of the property to the buyer, the senior mortgage holder’s due-on clause is triggered regardless of the form used to document the sales transaction.

Regardless, the mortgage holder can only call the mortgage when they actually discover a change of ownership has taken place. When the buyer’s option is not recorded, and the lease agreement is for a term of three years or less, the mortgage holder may not discover any transfer of an interest in the real estate which triggered their due-on clause has taken place.

If the mortgage holder later discovers a change of ownership has taken place, their only remedy against the buyer and seller is to call the mortgage due, or arrange to recast the mortgage as a condition for waiving their right to call and allowing an assumption by the buyer. Additionally, the mortgage holder may not recover the retroactive interest differential (RID) for the period before they discovered the transfer and called the mortgage. [Hummell v. Republic Federal Savings & Loan (1982) 133 CA3d 49 (Disclosure: the legal editor of this publication was the attorney of record for the owner in this case)]

However, an adviser, such as a broker or attorney, assisting the buyer or seller to mask the change of ownership from the mortgage holder with the primary purpose of avoiding due-on enforcement may be held liable for wrongfully interfering with the mortgage holder’s right to call or recast the mortgage, an offense called tortious interference with prospective economic advantage.

The adviser’s liability arises based on the extent to which their actions were specifically intended to conceal the transfer and prevent a call by the mortgage holder, and on the foreseeability the mortgage holder will incur losses due to the concealment. [J’Aire Corporation v. Gregory (1979) 24 C3d 799]

The mortgage holder’s losses caused by the adviser’s wrongful interference are calculated based on the interest differential between the note rate and the market rate on the date of sale, retroactively applied from the date of discovery by the mortgage holder to the date of the transfer.