[WSBARP] Due on Sale Clauses and Real Estate Contracts

Tue Dec 12 11:16:27 PST 2023

Not having been down this road, but "listening in" on discussions amongst
colleagues over the years, and documents that have crossed my desk, my
impression has always been what seems a logical approach:

As someone pointed out, it's all about the language of the due on sale
clause and how the REK is worded, particularly as to when interests vest.

Almost certainly you cannot have a deed or transfer of actual interest in
the property. It cannot be "transferred", "sold" or "encumbered".

I've seen REK's drafted as essentially a letter of intent - if buyer pays X
over Y period, owner will transfer property to them upon completion. Deed
stays in owners' name. I've seen this done for other reasons too (like a
buyer wanting the security of staying owner until paid), and I've heard
others use it to escape the lending call. I can see how that might work.

Riskier for buyer, as there is no security, and only option if there is a
problem is to bring a suit for specific performance. Also takes away from
the buyer the option for any lines of credit, or any benefit of having
those payments on their credit report (if they are wanting to repair
credit). For the buyer's sake, they'd want language in there for recouping
any value/cost of improvements that add value to the property if the deal
falls through before final execution - essentially putting the common law
quantum meruit claim into the contract, unless there is some waiver upon
breach of buyer (etc.etc. - all negotiable issues).

I wonder, too, if that doesn't pose risks to the owner if the buyer could
now be protected under the RLTA, no matter what disclaimers are made. But
you do your best in that department in the drafting.

I've seen a few of these and it's insured essentially like a lease - owner
has to carry the insurance (which cost can be worked into the REK), with
to-be-buyer as additional insured. Would-be-buyer has to get insurance on
their personal stuff - I can't remember if it's technically a renters'
policy, but there is some form of pseudo homeowners' policy for personal
property for a non-owner of the property.

I agree that a different name on the tax rolls might give a lender pause if
they are paying that close of attention; but it's entirely common to have
tax bills go elsewhere other than the property owner, so ... ?? And if the
REK doesn't actually transfer the property yet, that's the key.

Is this being "encumbered"? yes. But if the clause is the "encumbered by a
junior mortgage or deed of trust" or such, you side-step that.

But there is no "transfer" or "sale" until there is one; only a *right *to
have it transferred or sold, in which case *at that point* of transfer or
sale, the clause is tripped.

It makes sense from a lender's perspective. There is no actual transfer of
right - thus no compromise on their security. Upon transfer/execution, then
the due on sale kicks in, but no different than any sale at that point.

Carmen Rowe

Phone: (360) 669-3576 (direct cell)
Email:  Carmen at GryphonLawGroup.com

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> Message: 5
> Date: Thu, 7 Dec 2023 14:33:53 +0000
> From: Nestor Gorfinkel <nestor at GlcLawyer.com>
> To: WSBA Real Property Listserv <wsbarp at lists.wsbarppt.com>
> Subject: Re: [WSBARP] Due on Sale Clauses and Real Estate Contracts
> Message-ID:
>         <
> BN0PR08MB734405B74F75A970CB90E4F8D88BA at BN0PR08MB7344.namprd08.prod.outlook.com
> >
>
> Content-Type: text/plain; charset="us-ascii"
>
> The problem arises is how does the property appraiser and tax collector
> deal with the real estate contract. When recorded, do their records reflect
> the contract vendor or vendee. If they make the change and a tax bill is
> issued in the name of the vendee/purchaser, when the Lender verifies the
> payment of the property taxes, they can then move to enforce the due on
> sale clause. Also, regarding property insurance. Whose name will appear on
> the property insurance? The change in name can also alert the Lender.
>
> Be careful.
>
> Cordially,
>
> Nestor Gorfinkel, Attorney at Law
> Licensed in Florida & Washington State
> Florida Civil-Law (International) Notary
>
> [cid:image002.jpg at 01DA28F0.7D57F770]
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> From: wsbarp-bounces at lists.wsbarppt.com <wsbarp-bounces at lists.wsbarppt.com>
> On Behalf Of Paul Neumiller
> Sent: Wednesday, December 6, 2023 7:02 PM
> To: WSBA Real Property Listserv <wsbarp at lists.wsbarppt.com>
> Subject: [WSBARP] Due on Sale Clauses and Real Estate Contracts
>
> What is the experience of people under this scenario (and I know I need to
> read the loan documents)?  Client wants to buy commercial property with an
> existing first lien.  Client doesn't have the money to pay off the first
> lien but the seller is willing to carry the balance financing.  Parties
> contemplate that the Client will pay both the existing loan and the seller
> carryback loan.  Title company is suggesting that a Real Estate Contract
> might be able to get around the Due on Sale Clause in the existing loan
> because title does not vest in the Client/Buyer until the financing is paid
> in full.  This doesn't quite pass the smell test for me.  In this age of
> rising interest rates (or, at least, higher interest rates), are lenders
> really not calling in their loans under the standard Due on Sale Clause if
> the parties use a Real Estate Contract?  What is the experience of the
> title companies?
>
>
> [cid:image003.jpg at 01DA28F0.7D57F770]
>
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