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Latent Landmine Survey: Due On Transfer Clauses?
(This article is NOT legal advice. Consult an attorney for any specific legal issues you may have.)
I’ve created my “Latent Landmine” series to highlight items that are often unnoticed, and may not affect some people; but nonetheless could cause misery to others if they run afoul of them. Caveat Emptor, “Buyer Beware” is alive and well today as it’s ever been. However, the way to fight this is by building on the concept that “knowledge is power”. Hopefully, if all goes well, my series will help someone identify a potential problem, if not avoid it altogether…that’s the goal anyway.
I’m working on a new post that deals with the problems that can be caused by Due on Transfer clauses in mortgages (promissory notes, to be more precise). My legal practice doesn’t necessarily expose me to EVERYTHING going on in the real estate world (gasp…yes Virginia, I know that’s shocking to hear; but it’s true; so in the interests of getting a broader perspective, I’m hoping RCG readers can help with a little informal survey…pretty please? 
Although Due on Transfer clauses may come in a variety of specific terms, they all are trying to get at pretty much the same thing… in the event of any subsequent transfer of the collateral (real estate), the unpaid balance of the loan shall become immediately due and payable.
The Due on Transfer clause has a “kissin’ cousin”, a Due on Sale clause, which is trying to get at a similar; but slightly different matter…in the event of any subsequent sale of the collateral (real estate), the unpaid balance shall become immediately due and payable. NOTE: The difference is that the due on transfer clause is the broader term, and the due on sale is the narrower term (i.e. all “sales” are “transfers”; but not all “transfers” are “sales”). I’m not really concerned about the Due on Sale clause…it’s the Due on Transfer clause that I’m concerned about (hopefully, “why” I’m saying this will be clear in my follow-up post).
Here’s a real world example: Here in WA State, Paragraph #8 in both LPB standard form promissory notes, 28A-05 and 28A-05(1), have a hybrid due on sale and transfer clause as follows:
- LPB Form 28A-05: http://www.wsba.org/info/28a05note.pdf
- LPB Form 28A-05(1): http://www.wsba.org/info/28a05lnote.pdf
OK, so here’s the question again: Are you seeing very many Due on Transfer clauses in promissory notes on new loans?
Thanks for your help RCG readers!!
Posted: May 24th, 2007 under Legal Issues.
Tags: clauses, due-on-transfer, legal, real-estate
Comments
2.
Comment
from Joe Beitey
Time May 25, 2007 at 9:44 am
Hi Jillayne,
Thanks for replying. A deed of trust, since it matches with a promissory note, may often carry the same provisions as the note it goes with (it’s actually better draftsmanship if terms match on both instruments).
If you don’t mind me asking, since I’m trying to get a sense for how widespread the use of these terms currently are, is this a relatively “new” loan…say w/in the last year?
3.
Comment
from Elizabeth Weintraub
Time May 25, 2007 at 5:02 pm
You’re talking about alienation clauses and all newer loans contain such a clause. An acceleration clause is a form of an alienation clause as it allows the lender to call the loan due and payable for other reasons as well.
4.
Comment
from Chris Lengquist
Time May 27, 2007 at 6:28 am
I’m going to follow this with interest. I have a couple of clients that purchase property “subject to”. They simply ignore the Due on Transfer/Sale clauses…sometimes with the banks knowledge, though there is no explicit consent.
It seems the bank just wants to make sure it is getting paid. If that is happening they are happy. Especially when the “subject to” buyer is bringing the loan back up to date.
5.
Comment
from Joe Beitey
Time May 29, 2007 at 10:19 am
Hi Elizabeth,
Sorry for the delay in responding to you. I had to run right at 5pm last Fri to make my weekend connection.
OK, thanks, that’s what I wanted to know…all new loans have anti-alienation terms. However, do you know if lenders are frequently using broad anti-anlienation terms, like due-on-transfer clauses; or are they more commonly using narrower anti-alienation terms, like due-on-sale terms?
6.
Comment
from Elizabeth Weintraub
Time May 29, 2007 at 10:24 am
Hi Joe:
I haven’t personally read them but when you think about it, would lenders tend to be more lax about protecting their investments or more lenient? I would suspect the terms would be broad and cover everything. However, as another reader pointed out, would lenders be aggressive and try to enforce those clauses when the alternative might be foreclosure? I suspect not. I suspect they are happy just to get the payments. That’s what I hear from the grapevine in Sacramento and from an escrow officer I know who deals exclusively in land contracts.
7.
Comment
from Joe Beitey
Time May 29, 2007 at 10:41 am
Hi Chris,
Over the last several years, I’ve met several real estate investors doing just what you describe…simply ignoring due on sale/transfer clauses in their deals, often while also taking back an unrecorded QC Deed from the current owner. Clearly, these R/E investors risk trouble from the lender doing this. Unfortunately, so can many other people who do subsequent transferes of their property (which I’ll discuss in my 2nd post on this). So far, my experience has been the same as yours…the banks don’t seem to care about subsequent transfers of the collateral so long as the debt gets paid by someone, anyone. However, let rates go up, and we may be playing a whole different game…
…Hold it, I’m getting ahead of myself…that’s in my follow-up post.
8.
Comment
from Joe Beitey
Time May 29, 2007 at 11:00 am
Hi Elizabeth,
I suspect banks would more typically use the broader anti-alienation term, as opposed to the narrower term (but I wasn’t sure what others were experiencing, so that’s why I made this post). So long as rates are relatively low, lenders may not want to get aggressive calling loans due for violations of anti-alienation clauses; particularly if competing lenders have low/lower rates for these borrowers. However, if rates go up, this may change.
You’re getting ahead of me…this is in my 2nd post…it’s coming asap…
Thanks again for your input!! 
9.
Pingback
from Latent Landmine #1: Due on Transfer Clauses | Rain City Guide | A Seattle Real Estate Blog…
Time June 11, 2007 at 10:20 pm
[...] Based on the comments from my earlier post, due on transfer clauses are one of a variety of “anti-alienation clauses” used virtually all the time in new loans (thank you, Elizabeth!! J). However, since due on transfer clauses are only one member in this group; about all I feel comfortable saying is that due on transfer clauses are “frequently” used in new loans (not a really accurate term, I know; but there you have it). [...]
1. Comment from Jillayne Schlicke
Time May 24, 2007 at 9:05 pm
Hi Joe,
My note AND deed of trust both have a “due on sale OR transfer” clause. The lender used FannieMae/FreddieMac form 3200.