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May 16, 2018

Acceleration Clause


Word of the day

Acceleration Clause

A provision in a mortgage, trust deed, promissory note, or contract for deed (agreement of sale) that, upon the occurrence of a specified event, gives the lender (payee, obligee, or mortgagee) the right to call all sums due and payable in advance of the fixed payment date. This event might be default on an installment payment, destruction (waste) of the premises, placement of an encumbrance on the property, or its sale or assignment. Usually the payee has the option to accelerate the note upon default of payment of any installment of interest or principal when due, provided he or she gives adequate notice and specifies a time within which the defaulting party may cure the default. The payee may also accelerate for other breaches of provisions in the contract, such as failure to pay taxes and assessments or to keep the property insured or in repair. A lender may also exercise acceleration when it is discovered that the borrower (mortgagor) does not hold good title to the mortgaged property, contrary to prior claims at the time the mortgage was created, or upon condemnation of all or part of the premises.

The provision for acceleration does not exist unless it is expressly set forth in the mortgage or contract-for-deed document. The acceleration provisions stated in the mortgage should be consistent with those stated in the promissory note. An acceleration clause is also called a due-on-sale clause or alienation clause when it provides for acceleration upon the sale of the property. A court might hold an acceleration clause to be unenforceable if it is deemed an unreasonable restraint or restriction on alienation.

The seller under a contract for deed usually inserts an acceleration clause in order to declare the entire balance due and payable when the buyer fails to cure a default. Without this clause, the seller would have to sue the buyer as each installment payment became due and unpaid.

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