Contemporary lenders presently utilize at least two types of clauses in a security instrument (mortgage or deed of trust) to generate additional income. Due-on-sale clauses accelerate the balance of the obligation upon the sale or transfer of the subject property,' and due-on-encumbrance clauses accelerate the balance of the obligation upon the placing of an additional burden or encumbrance on the property. Such acceleration allows adjustment of interest to current rates whenever encumbered property is sold. In a second type of clause, prepayment penalty, lenders charge a penalty for early payment of a loan prior to its maturity date. Because of these kinds of limitations on the mortgagor, it can be said that these provisions are restraints on alienation, although permissible ones in most jurisdictions.
California courts and other courts across the country have had difficulty balancing the need for acceleration clauses in an inflationary economy with the traditional prohibition against restraints on alienation. This article analyzes the cases which have dealt with acceleration clauses and the solutions which have been formulated.
Hill, James D.
"Due-on Clauses: A Trend toward Equitable Enforcement,"
University of Dayton Law Review: Vol. 2:
2, Article 4.
Available at: https://ecommons.udayton.edu/udlr/vol2/iss2/4
James D. Hill, Associate Professor of Law, University of Dayton; B.A., University of Nevada, 1957; J.D., University of Denver, 1964