What is the Alienation Clause in Real Estate And How it Works?

By: ROS Team

In the world of legal and contract language, the phrase “Alienation Clause” may seem like it belongs in a sci-fi book. However, it plays a vital role in many legal agreements, particularly in real estate and business contracts. This guide is here to make the Alienation Clause easier to understand, explaining its importance and effects.

What is Alienation in Real Estate?

Alienation in real estate refers to the voluntary act of an owner of a property to dispose of the property, while alienability is the capacity for a piece of property or a property right to be sold or otherwise transferred from one party to another.

An alienation clause, also called a due-on-sale clause, in real estate, is a provision that prevents a property owner from transferring a mortgage to a new person. It is a contingency that requires the borrower to pay off the remaining mortgage balance immediately during the sale or transfer of a property title before a new buyer can take ownership.

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How Does Alienation Clause Work?

Alienation clauses are often used in contracts for the sale of real estate, intellectual property, and other valuable assets.

There are two main reasons why parties might include an alienation clause in a contract:

1) To Protect their Interests:

The party who adds an alienation clause worries that the other party might transfer their interest to someone unsuitable. For instance, a real estate seller may worry that the buyer will transfer their interest to a developer who intends to demolish the property.

2) To Control the Terms of the Contract:

The party who adds an alienation clause to the contract wants to retain control over the terms. This clause allows them to give approval or disapproval for any transfer of interest in the contract. They have the power to decide whether the terms of the contract can be changed or not.

What is an example of an Alienation Clause?

An example of an alienation clause is a provision in a mortgage or deed of trust that requires the borrower to pay off the remaining mortgage balance immediately during the sale or transfer of a property title and before a new buyer can take ownership.

Alienation Clause vs. Acceleration Clause: What’s the Difference?

An alienation clause and an acceleration clause are both provisions in a mortgage or deed of trust that allow lenders to demand full, immediate repayment of the loan all at once, ahead of the stated loan term.

However, the contract language around the acceleration clause typically centers on instances of non-payment and foreclosure, while the alienation clause is activated when the borrower sells or transfers their home.

Alienation Clause Exceptions

Alienation clauses can be subject to several exceptions. Some of the most common exceptions include:

Transfers by operation of law. This includes transfers that occur as a result of death, bankruptcy, or other legal proceedings.
Transfers to a spouse or family member. Some alienation clauses allow for transfers to a spouse or other close family member without consent.
Transfers to a qualified buyer. Some alienation clauses allow for transfers to a buyer who meets certain criteria, such as being a financial institution or a government agency.
Transfers in connection with a corporate merger or acquisition. Some alienation clauses allow for transfers that are necessary to complete a corporate merger or acquisition.

Alienation Clause Terms

The terms and language used in an Alienation Clause can vary depending on the specific contract or mortgage agreement. However, here are some common terms and concepts you might encounter in an Alienation Clause:

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1. Alienation or Transfer:

Refers to the sale, transfer, or other forms of alienation of the property by the borrower.

2. Prior Written Consent:

Indicates that the borrower must obtain approval from the lender before proceeding with the sale or transfer of the property.

3. Lender’s Discretion:

Highlights that the lender has the right to decide whether to grant or withhold consent. The lender often has the discretion to evaluate the financial stability and creditworthiness of the proposed new property owner.

4. Event of Default:

Describes the consequence of failing to obtain the lender’s consent before alienating the property. This failure is often considered an event of default.

5. Acceleration of Repayment:

States that in the event of default, the lender may choose to accelerate the repayment of the entire outstanding loan amount. This means the borrower must pay off the mortgage in full immediately.

6. Due-on-Sale Clause:

An alternative term for Alienation Clause, emphasizes that the full loan amount is due upon the sale of the property.

7. Assumption of Mortgage:

Some Alienation Clauses may include provisions for the assumption of the existing mortgage by the new property owner. This might outline the conditions under which such an assumption is allowed.

8. Notices and Communication:

Specifies the process for communication between the borrower and lender regarding the proposed sale or transfer. It may outline the required documentation and timelines for seeking consent.

9. Exemptions:

Some Alienation Clauses may include exemptions or exceptions, specifying certain situations where consent is not required. Common exemptions include transfers between family members or transfers upon the death of the borrower.

10. Governing Law:

Indicates the jurisdiction whose laws will govern the Alienation Clause. This is important for understanding the legal framework within which the clause operates.

Why Do Lenders Use the Alienation Clause?

Lenders use the alienation clause in real estate for several reasons, including:

Protecting their Interests: The alienation clause ensures that the lender is repaid before the borrower is allowed to sell their property and prevents them from transferring the same mortgage to the new buyer.

Ensuring Timely Repayment: The clause makes it a requirement to settle the outstanding balance before the property’s title can be transferred to the buyer.

Preventing Unpaid Debt: Borrowers may have unpaid debt at the time of their property sale and try to avoid paying the rest of their mortgage because they are too much in debt. That would mean the lenders would not get paid back and they would lose money. The alienation clause makes this factor nearly impossible for borrowers not to have to pay back their mortgage to their lenders.

Protecting Against Assumable Mortgages: The clause prevents new buyers from taking over an existing or previous mortgage. If the borrower decides to transfer the property, the mortgage must be paid in full immediately.

Alienation Clause in Real Estate: Bottom Line

In the complex world of legal agreements, the Alienation Clause stands out as a critical component, especially in real estate and business transactions. Borrowers and property owners must carefully review and understand the implications of this clause before entering into any contractual arrangement.