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| CRE Online > Real Estate Law > Bill Bronchick > Question and Answer |
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Question by Walt Shorts:
Does a recorded lease option represent a transfer of equitable interest thereby triggering the due-on-sale clause in the existing mortgage? Answer By William Bronchick: The due-on-sale clause of a mortgage prohibits the transfer of title or "any interest therein" without satisfying the indebtedness or obtaining the lender's prior approval. A lease is a transfer of an interest in real estate. An option by itself is not. An option is a contractual right, not a transfer of an equitable real estate interest. See, e.g., Wurdemann v. Hjelm, 102 N.W.2d 811 (Sup Ct Minn 1960). Federal law (12 United States Code §1701-J) places some restriction on the lender's right to enforce a due-on-sale provision. One such restriction is that the borrower may grant a "leasehold interest of three years or less not containing an option to purchase." Thus, the opposite is also true; a lease of any term containing an option violates the due-on-sale. What is not clear is whether a lease "in conjunction" with an option is a violation. The specific language of the Federal law refers to a lease "containing" an option. Would two separate agreements violate the due-on-sale? Would a lease to me and an option to my corporation under two separate documents violate the due-on-sale? This discussion is, for the most part, academic, since the lender is not likely to discover the transaction. Personally, I have never seen or heard of a lender enforcing a due-on-sale provision upon the borrower granting a lease with option. Disclaimer: The foregoing is not intended to be given as legal, financial or tax advice, but intended for instructional use only. If you require legal, financial or tax advice you should seek the assistance of a qualified professional.
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