I’ll admit it: I’m old and getting older.
This hit me earlier this week as I argued with a lawyer about the enforceability of due-on-sale clauses in commercial mortgages. The conversations boggled my mind, because the debate was “settled” in 1982 when Garn-St. Germain (citation below) was enacted – and the debate ended: due-on-sale clauses generally are enforceable. Yet this was the 2nd time that I faced the same issue with lawyers in the last month.
So, why are we talking about it today?
A “due-on-sale” clause makes a transfer (or any lien, etc.) of the real estate collateral, or even of the ownership of the borrower, a default under the commercial mortgage loan. Once a default exists, then the lender may accelerate the commercial loan and exercise remedies. The borrower may still do the transfer; but there could be tough consequences.
Twice in the past month, I’ve had lawyers carve-up loan documents or muddy-up legal opinions on the due-on-sale topic, as the lawyer argues the following:
- the commerical lenders’s due-on-sale clause is not enforceable, either because of an express state statute, or simply because the clause is an unreasonable restraint on alienation; and consequently,
- the loan documents should refer to the statute; and
- the legal opinion of borrower’s counsel should exclude or “except to” the enforceability of the due-on-sale clause
I must be really, really old because I’m remembering things other people have forgotten: with respect to commercial mortgage loans -
- On October 15, 1982, Congress passed the Garn-St Germain Depository Institution Act (“Garn-St Germain“), which authorizes the blanket use and automatic enforcement of due-on-sale clauses. See 12 U.S.C.A. § 170lj-3(a) to 3(g) (1987).
While it does not apply to certain residential mortgage loans, Garn-St Germain places all commercial lenders on a competitive footing and eliminates the confusion (in the late ’70s and early ’80s) surrounding the enforceability of due-on-sale clauses. The federal law recognizes that commercial parties may address this topic as a bargained-for element in the contract. See 12 U.S.C.A. § 1701j-3(b)(2).
We can draft an enforceable due-on-sale clause. Right? Right.
So “why” are we revisiting the early’80s on this topic?
Maybe it’s just the nature of the work: lawyers look for problems in documents; lawyers adhor legal opinions; and when combined together, we simply can’t remember the simple things from long ago.
Collective amnesia.
I can’t decide which TV show I’m stuck in:
Please comment below. If you can remember to do so.