A due-on-sale clause is an agreement that usually exists in loan documents where the borrower is representing to the lender that they are going to be using the building or the real estate, whatever kind it is, for certain some purpose, and they are personally going to be using it.
They get the loan and that is one of the representations that the lender is relying on: how are you going to be using this property? Because they want to be make sure that they property is protected and used in the appropriate way, and that it’s value is being preserved. One way they so that is through this kind of a term, a due-on-sale clause.
The due-on-sale clause says if you sell this property, that is secure our loan, we can call your loan due. We can accelerate the due date on your loan and require it all to be paid when you sell. This may be the case even though you may be perfectly willing to continue to make the payments. Even though the deed of trust that the lender may have on the property is still valid and enforceable. The lender still has that provision in the loan document that says, no we can call the loan due if you sell the property.
Occasionally, lenders will use that term for some negotiating leverage where they don’t have any objection to allowing you to sell the property, or allowing the new person to take over the loan, but, they’ve got the power to extract something out of you, so sometimes they will. Say okay, we’re going to waive our due-on-sale clause here, but it’s going to cost you $5,000. Lenders can do that sometimes.
There is a statute in Arizona that calls into question the enforceability of due-on-sale clauses. There’s also some case law in Arizona that calls into question the enforceability of due-on-sale clauses. You’re going to want to look at those before you make any decisions based on some expectations you have of how the law is going to apply to your situation. It may not be as it seems in the loan documents.
Another thing you need to be aware of when it comes to due-on-sale clauses is what constitutes a sale, because sometimes you can trigger a due-on-sale clause unintentional. For instance, an individual may own property in their own name, maybe it’s a husband and wife that owns property in their own name, and then they convey that property into a living trust that’s going to benefit their family. Is that a transfer? Is that a sale? Does that trigger the due-on-sale clause? Well, it may, it may not, but it’s something that you may want to consider before you make a move on that.
Also, you may have an individual, or a husband and wife that own property personally, and they decide hey, this really ought to be owned by the business, it’s our business that’s owning this property. Let’s convey it into the name of our business. You have a similar situation there. The use of the property may not have changed but the actual ownership of the property has changed and there is a risk that you have triggered a due-on-sale clause in that instance. It’s something that you want to be aware of so you can make the best decision possible.