Atlanta | Boston | Chicago | Dallas | Denver | Houston | Kansas City | Los Angeles | Nashville | New York
Phoenix | San Francisco | Silicon Valley | St. Louis | Washington, D.C. | Wilmington
polsinelli.com
Enforcement of a Commercial Loan Aer the
Property Securing the Loan is Sold or Transferred
Enforcement of due-on-sale clauses started growing in popularity in the
1970s as a result of instability in the economy and rising interest rates.
To circumvent higher interest rates, borrowers resorted to alternaves
to convenonal bank nancing, such as mortgage assumpons. Because of
this trend, lenders began exercising their rights contained in the due-on-sale
clauses of their loan documents and requiring the balance of their loans to
be paid in full when properes were sold. In response, borrowers mounted
challenges to such clauses as against public policy for unreasonably
restraining alienaon of property.
Unfortunately for lenders, certain courts began ruling that due-on-sale
clauses were not to be enforced unless certain criteria were met – e.g. the
lender showing that it was harmed by the transfer or that its enforcement
was not “unreasonable.” See La Sala v. American Sav. & Loan Assn., 5 Cal.3d
864, 882 (1971) (“When such enforcement is not reasonably necessary
to protect the security, the lender’s use of the clause to exact collateral
benets must be held an unlawful restraint on alienaon”). Even when the
subject loan documents explicitly stated that the loan could be accelerated
upon a “transfer” of any poron of the property, some state courts refused
to enforce these due-on-sale provisions. The courts usually based their
decisions on state policies that encouraged transferability of property.
Therefore, any “unreasonable” restraint on the transfer of property was
found to be unenforceable.
In this Issue:
Enforcement of a Commercial Loan
Aer the Property Securing the Loan
is Sold or Transferred......................... 1
Consideraons in Connecon with
Bankruptcy Remote Enes ............. 2
For More Informaon ..................... 5
in the news
Loan Enforcement and
Creditors’ Rights
December 2016
Lender’s Edge
Newsleer
