Chapter 4: Real Property and Conveyancing

§ 4.1.Mortgages: "Due-on-sale" clause-Restraint on Alienation.Inflation has the effect of increasing litigation between banks and borrowers, as banks seek to recover loans paying interest at well below the market rate and borrowers seek to maintain the interest rates on their loans.One issue raised in this litigation is the enforceability of "due-on-sale" clauses in mortgages, which permit the lender to accelerate the repayment of principal if and when the borrower conveys the mortgaged property.1 Some jurisdictions have held that due-on-sale clauses are unenforceable, as an unreasonable restraint on alienation, unless the lender's security is impaired by the transfer.2 *ROBERT M. SCHLEIN is an associate with Nutter, McClennen & Fish, Boston.§ 4.1.' The "due-on-sale" clause construed by the Massachusetts Supreme Judicial Court in Dunham v. Ware Savings Bank, 1981 Mass.Adv.Sh. 1607, 423 N.E.2d 998, provided:The Mortgagor also covenants and agrees that in the event the ownership of the mortgaged premises or any part thereof shall by the voluntary or involuntary act of the Mortgagor or by operation of law or otherwise become vested in any person, partnership, corporation, trust, or association other than the Mortgagor, the entire mortgage debt then remaining unpaid shall, at the option of the Mortgagee, forthwith become due and payable.Id. at 1608 n.4, 423 N.E.2d at 1000.A similar clause may permit the lender to accelerate the debt when the borrower further encumbers the property.The Massachusetts court explicitly took no position as to the enforceability of such a "due-on-encumbrance" clause.ld. at n.3.In some instruments due-on-sale and due-on-encumbrance provisions are combined in one clause.See the sample clause in Note, Eriforcement of Due on Transfer Clauses, 13 REAL PROP., PROB.& TR.J. 891, 892 (1978).' See, e.g., Wellenkamp v. Bank of America, 21 Cal.3d 943, 148 Cal.Rptr.379, 582 P.2d 970 (1978) and Tucker v. Pulaski Fed.Sav.& Loan Ass'n, 252 Ark. 849, 481 S.W.2d 725 (1972).See also Gore, Eriforceability of Due on Sale Clauses-A Bibliography, 5 ALI-ABA CouRSE MATERIALS J. 109 (1981); Note, Due on Sale Clauses and Clogging the Equity of Redemption, 36 WASH.& LEE L. REv.1121 (1979); and Dunn & Nowinski, Eriforcement of Due on Sale Clauses-An Update, 16 REAL PROP., PROB.& TR.J. 291 (1981).Of course, each jurisdiction has different precedent on the subject.While the policy discussion relied upon in Wellenkamp v. Bank of America, supra, made the decision noteworthy, the California Supreme Court had taken a similar position four years previous in holding due-onencumbrance clauses unenforceable unless the lender's security was impaired.See LaSala v.