What is a Due On Sale Clause?

When you have a business loan you know that it is filled with plenty of legal clauses and statements that are part of the contract. One of the most common clauses in a business loan document is the due on sale clause. Some business owners wonder, what is a due on sale clause? This is a statement in the contract that utilizes a building or property as security on the loan and requires the loan to be repaid should the property be sold.

The Reasons for Due On Sale Clauses

Banks may want to include due on sale clauses in loan agreements for several reasons. They may want to protect the value of the property by ensuring that it will not be sold for significantly less than what it is worth. Once the property is sold the lender will have little hold over the loan so they may want to ensure that they are properly paid. The lender also wants to have some control over the use of the property by being able to call in the loan if the property sells.

Enforceability of Due on Sale Clauses

There has been some question regarding the enforceability of due on sale clauses. If you are being held to such a clause but feel it is unfair you should speak with a qualified commercial law attorney. Your lawyer will review the contract in depth to determine the best way to proceed. The laws can be rather complex and there could be some reasons why the clause is not enforceable in a particular situation.

Negotiating Points in Commercial Loans

There may be some negotiation points in commercial loans. Lenders may be willing to work with borrowers on some of the areas of the loan contract. The due on sale clause is one of the areas that may be up for negotiation. The lender may waive the clause in exchange for a specific amount of money. This is an area that can be discussed with lenders. A commercial law attorney will assist you in negotiating with the bank if you want to sell property with a due on sale clause in the contract.

Triggering Due On Sale Clauses in Contracts

Sometimes a transaction may trigger the due on sale clause to take effect, even though that is not the intent of the business deal. For example, if you choose to change ownership of your commercial property from a personal name to a business entity it could cause the bank concern even though the owner is still technically the same person. If you are involved in any loan contract deal it is best to have it reviewed by an attorney before signing off on it.

Contact the experienced commercial law attorneys at Udall Shumway to discuss your case today.

This blog should be used for informational purposes only. It does not create an attorney-client relationship with any reader and should not be construed as legal advice. If you need legal advice regarding Due On Sale Clause, or any other commercial litigation matters, please feel free to contact Joel E. Sannes at 480.461.5307, or log on to udallshumway.com,  or contact an attorney in your area. Udall Shumway PLC is located in Mesa, Arizona and is a full service law firm. We assist Individuals, families, businesses, schools and municipalities in Mesa and the Phoenix/East Valley.