A Due on Sale-Consent by Lender clause (the “Clause”) is industry standard language found in commercial real estate loan documents. From time to time, the Clause may be an issue for a bank client/borrower when executing a commercial real estate loan transaction. As such, sometimes a bank will consider removal of the Clause from the loan documents. A typical fact pattern will go something like this: AnyTown Bank (the “Bank”) is drafting commercial real estate loan documents for a bank client/borrower. The loan is secured by a fee interest in commercial real estate being pledge by an individual or group of individuals (the “Grantors”) whom are neither borrowers nor guarantors on the underlying debt. The Grantors object to the Clause in the commercial real estate loan documents usually found in the note, loan agreement, and deed of trust. In order to accommodate the client/borrower and Grantors, the Bank would like to exclude the Clause from commercial real estate loan documents reasoning that since the Grantors are neither the obligors nor the guarantors on the underlying debt, they are not obligated on the indebtedness related to the real estate and thus the Bank should never have a reason or cause to object to minor changes in ownership among the Grantors. Despite the fact that removal of the Clause from loan documents will not impact the bank’s security interest priority in the real estate collateral (assuming the Bank properly attaches and perfects its security interest in the commercial real estate), from the banking perspective, there are a few reasons which will be discussed in my follow up blogs to neither alter the Clause by extra agreement nor include the Clause despite the client’s and/or Grantor’s objections.
This is the first in a series of blogs that will discuss the different types and priorities of the Due on Sale Clause in commercial real estate loan documents.