Bulletin: NL000061

Dear Associates:

Many mortgages and deeds of trust contain a "Due on Sale" clause. A typical clause reads as follows:

"If there shall be any change in the ownership of the premises covered hereby, without the consent of the mortgagee, the entire principle and all accrued interest shall become due and payable at the election of the mortgagee and foreclosure proceedings may be instituted thereon."

The effect and enforceability of a due on sale clause varies from state to state. However, if a lender feels that the clause is enforceable, the lender may demand that a borrower/buyer pay off the loan or consent to a modification of the loan terms to increase the rate of interest.

If you are closing the transaction, you may wish to avoid any possibility of a later dispute when a buyer is taking title subject to a mortgage or deed of trust that is nonassumable because of a due on sale clause. You may do this by obtaining a statement addressed to you acknowledging that the parties are aware of the effect of the due on sale clause and holding you harmless from that effect. Below is a suggested form of the statement.