New Jersey


New York


Due on Sale Clause and Transfers to Trusts 12 ups § 1701j-3

If you read through your mortgage carefully, you will notice that the bank reserves the right to accelerate the repayment of your loan in the event that the property is sold or transferred without the bank’s written approval. This clause is there to safeguard the bank’s rights in the property, which is the collateral for your loan. While an outright gift or sale to a third party is what the clause is intended to guard against, transfers arising out of estate planning strategies can and do trigger a breach of this clause.

Initially, state courts did not like to enforce such clauses. It was viewed as a draconian measure on the part of the lender. However, banks responded by lobbying for the passage of this statute. 1701 was enacted to specifically overturn state court decisions that were adverse to the due-on-sale provisions, and preempt any state law that specifically prohibited its enforcement.

The due-on-sale terminology is a bit of a misnomer as all transfers are covered. Thus if the owner changes on the title to the property, through sale, transfer, gift or otherwise, the due on sale provision of a mortgage would be violated. This law applies to loans that are secured by real property.

Estate planning practitioners need to be careful to avoid strategies that can trigger a due-on-sale breach. The statute does permit transfers to inter vivos trusts where the grantor remains the beneficiary, and does not transfer the occupancy right. Another example of occupancy right is a transfer to a third party with a retention of a life estate.

It has been proposed and opined by Will and Trust practitioners that banks do not actively enforce due-on-sale clauses. However, the mere right of the bank to call a loan, should present too great of a risk to any estate plan, and should be avoided. Furthermore, the reluctance of lenders to enforce due-on-sale clauses is most likely due to current low interest rates and high inventory of properties on the market. Therefore, it is possible that banks will become more diligent in enforcing due on sale clauses if rates begin to rise or if the real estate market improves considerably.

For your will and trust questions you need a competent estate attorney. Joshua Kaplan, Esq., at Kaplan Law Practice, LLC., is an experienced attorney, who will create an estate plan that is right for you. Call now for a free consultation.