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acceleration clause

As defined and explained in this ONLINE Encyclopedia

1. A clause in a contract or deed that brings forward the right to the enjoyment of an estate in land on the happening of a particular event. In particular, a provision that specifies that on the happening of a given event an interest in land may become vested in another, or a clause in a conditional sale contract or an installment land contract that provides that the purchaser is obliged to pay the outstanding purchase monies, for example if the property is mortgaged or sold. An acceleration clause may be inserted in a lease to provide that, in the event of a default in the payment of rent, the entire rent for the residual term of the lease becomes due. Such a clause is generally unenforceable as it amounts to a provision for the payment of a penalty and is not an amount of 'liquidated damages' as based on the true loss suffered by the landlord (Puritan Leasing Company v. August, 128 Cal Rptr 175, 546 P.2d 679, 682 (1976); Fifty States Management Corp. v. Pioneer Auto Parts, Inc., 46 NY.2d 573, 415 NYS.2d 800, 389 N.E.2d 113, 116 (1979)). However, if it is considered as a reasonable payment that has been agreed by the parties as payable in the event of a breach of covenant, it may be enforceable (especially on the principle that the parties can agree in advance how and when rent is to be payable) (Rolfe v Peterson (1772) 2 Bro PC 436, 1 Eng Rep 1048 (HL); Fifty State v. Pioneer, supra at 116).  See also conditional interest, penal rent.

2. A clause in a mortgage, deed of trust or promissory note that permits the borrower or, more usually, the lender to advance the date for the repayment of the principal so that either party may seek to terminate a loan. An acceleration clause is most commonly brought into effect when a mortgagor is in default in complying with a term of the mortgage agreement (especially the non-payment of interest or real estate taxes); the mortgagee 'accelerates' the date on which the entire loan becomes due and payable, and if the debt is not then repaid in full, he may take steps to foreclose the mortgage or exercise his power of sale. Such a right may be exercised only if expressly provided for in the mortgage deed; in the absence of an acceleration clause the mortgagee merely seeks payment of any overdue amounts. An acceleration clause may be 'automatic' or 'optional'. An 'automatic' clause provides that on the happening of a specified event, e.g. a sale of the property or a default, the entire loan advances to maturity, although it is not a forfeiture clause. An 'optional' clause gives the mortgagee the right to demand the repayment of the entire loan if a specified event or default arises. Most acceleration clauses are of the optional type. An acceleration clause is usually construed against the mortgagee, especially when the provision is automatic. Also called a 'call provision' or, in the US, if the provision applies in the event the property is sold, a due-on-sale clause, 'due-on-transfer clause' or 'alienation clause', or if the property is encumbered, as by a second mortgage, a 'due-on-encumbrance' clause.  See also foreclosure, unconscionable bargain.

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bibliographic references:

Anno: 69 ALR3d 713: Acceleration Clause—Transfer of Property.
G.S. Nelson & D.A. Whitman. Real Estate Finance Law (4th ed. St. Paul, MN: 2001), §§ 7.6—7.8.
55 Am.Jur.2d., Mortgages (Rochester, NY), § 371.

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