Acceleration Clauses: What Commercial Borrowers Need to Know
In real estate, an acceleration clause is a loan provision that permits a lender to force a borrower to pay off the remaining balance of a loan if the borrower violates certain elements of their loan agreement. Most commonly, an acceleration clause can be invoked if a borrower defaults on their mortgage, however, there are a variety of other breaches of contract that could trigger an acceleration clause. These often include the destruction of the property and changes in ownership not consented to by the lender (similar to an alienation clause or due-on-sale clause). In some cases, acceleration clauses can be extremely strict, allowing a lender to demand full repayment of the loan if a borrower simply misses a single payment.
In the case that an acceleration clause is triggered, a borrower would to either need come up with the entire loan amount, or else the lender could attempt to foreclose on the property. In states with judicial foreclosure, the lender generally needs to take the borrower to court in order to foreclose on the property, while in states with power of sale, the lender can typically foreclose on the property without any court intervention.
Lenders Generally Use Acceleration Clauses as a Last Resort
Invoking an acceleration clause has several drawbacks for lenders; so it is usually only used when a lender believes there is a significant risk that the borrower will fail to continue making payments on their loan. For instance, if a lender demands loan repayment, they can only demand that a borrower pays the interest that they currently owe, and cannot demand the payment of any future interest on the loan.
In addition, a lender cannot enforce any prepayment penalties if they decide to invoke an acceleration clause. Since it is the lender’s decision to force early repayment, not the borrower’s choice, it would not be fair to require them to pay an additional fee.
Acceleration Clauses in Commercial Leases
In addition to being part of many residential and commercial mortgage agreements, acceleration clauses are often a part of commercial leases. Just like their counterparts in loan agreements, lease acceleration clauses allow a lender to demand immediate repayment of the remaining amount of their commercial lease, if certain conditions are met. However, some courts consider this extremely unfair, so in many cases, commercial tenants are granted a hearing on the issue.
Some commercial lease acceleration clauses are more lenient, and are more reflective of a property owner’s actual damages, or, at the very lease, discount the future rent at a specific rate in order to make the deal more equitable. On the other hand, some rental acceleration clauses are extremely strict, and attempt to recover costs like broker and property repair fees along with the entire amount of the remaining rent.