An acceleration clause, also known as an acceleration covenant, is a provision that is sometimes found in a contract agreement that requires a borrower to pay off the remaining balance on a loan immediately if certain conditions occur.
For example, the lending party to a contract may demand to be promptly repaid in full for the loan if the borrowing party breaches the contract by either missing too many payments or only making partial monthly payments towards the amount that is owed.
The exact details and procedures that are required for an acceleration clause matter will depend on the terms that the parties agreed to while engaged in negotiations prior to drafting and signing the final contract. Thus, many contract dispute resolutions or decisions will be contingent on the language or conditions contained in the contract.
For instance, in some cases, the parties may include a condition to an acceleration clause that states that a borrower will only be required to reimburse a lender for any past missed payments.
In most acceleration clause cases, however, a borrower will need to pay the total remaining balance on a loan along with interest and other costs. It should be noted that if a borrower does need to make interest payments, then it will usually be for interest on the current amount, not for future debts.
As a borrower, it is very important that you be able to identify an acceleration clause. The following statement is an example of what an acceleration clause might look like:
- “If the borrower defaults on any payments due under the contract agreement and fails to cure the issue before the next installment payment is due, then the lender may immediately demand the full amount of the loan; plus, any interest and/or fees.”
If you do not see a similar statement in your lending or lease agreement, or are still unsure of what to look for, then you may want to consult a local real estate attorney for further advice. A qualified real estate attorney will be able to determine whether your contract contains an acceleration clause, what the terms of your acceleration clause expect you to do in the event of a breach, and how you might be able to request an extension on your loan payments.
When Is an Acceleration Clause Used?
Acceleration clauses are used in a number of different situations. The most common types of contracts in which an acceleration clause will typically be found include:
- Mortgages;
- Lease agreements;
- Liens;
- Business loan agreements;
- Deeds of trust;
- Promissory notes; and
- Various other kinds of loans related to real estate or property.
Basically, lenders tend to use acceleration clauses in contracts when they fear a borrower might not be able to make payments on a loan or will do damage to a property in a way that might lessen the value of that property.
If I Breach the Contract, How Likely Is It That an Acceleration Clause Would Be Used Against Me?
As previously mentioned, the exact terms and conditions of an acceleration clause will vary by each individual contract. In other words, it will primarily be left up to the contracting parties to decide what may cause a clause to be triggered and specifically when the remaining loan amounts and/or interest will be due after a triggering event occurs.
The one commonality between most contracts that contain an acceleration clause is that such clauses typically are not activated automatically. In the majority of these cases, a lender usually must notify a borrower that they are about to default on a loan by sending them correspondence known as a “breach letter”.
The breach letter must include certain information, such as how long a borrower has to correct a default and what a borrower must do to cure the default, as well as a statement about the lender’s right to accelerate payment of the full debt amount.
Some common examples of when an acceleration clause will likely be used against a borrower include:
- When a borrower misses one or several installment payments;
- If a borrower breaches other conditions in a contract that trigger the clause;
- When a borrower fails to obtain homeowners insurance or cannot keep up with payments on an existing insurance plan;
- If a borrower sells the property on which a mortgage is attached to (e.g., “due on sale” clauses);
- When a borrower breaches various restrictions that a lender incorporated in an agreement to limit the borrower’s actions;
- If a borrower fails to pay property taxes; and/or
- When a borrower fails to keep a home in good condition.
Basically, any time a borrower fails to make payments on a loan and/or follow the conditions laid out in the contract for how to satisfy those payments, a lender may claim their legal rights under an acceleration clause and demand immediate payment. In a way, an acceleration clause serves as a safeguard for a lender to ensure that a borrower does not default on a loan, and acts as a penalty for a borrower when they do default or breach the agreement.
What Should I Do If My Contract Is Accelerated?
As discussed above, every contract will contain different conditions for when a contract is accelerated. Many contracts that have acceleration clauses will allow a borrower to cure their default and have their loan reinstated. While this might mean that a borrower will need to pay extra interest or fees on top of their remaining balance, most lenders are willing to work with a borrower.
In some cases, a borrower may be able to negotiate with their lender for a loan modification. A loan modification is a process that is used to restructure a loan. A loan can be modified in several ways, such as by reducing the amount of payments owed each month or extending the amount of time that a borrower has to pay off the remaining balance.
In other instances, a lender may waive their rights to invoke an acceleration clause by entering into another agreement with a borrower that says something to the effect of if the borrower promises to continue making payments on their loan, then the lender will not seek legal action to accelerate payment.
One other option that a borrower may have is if a lender demands payment under an acceleration clause before it is due or in a manner that breaches the agreement, then the borrower may be able to dispute the issue in court. For the best possible outcome, a borrower should contact a lawyer about an acceleration clause issue immediately.
What Can A Lawyer Do About Contract Acceleration Clauses?
As is evident from the above discussion, an acceleration clause can have devastating consequences for both a borrower and a lender. Thus, if you have any questions or are involved in a dispute over an acceleration clause matter, then it may be in your best interest to contact a local contract lawyers for further legal guidance. An experienced real estate lawyer will be able to assist you in communicating or negotiating with your lender for more time.
Your lawyer can also aid you in drafting a new agreement, modifying the terms of an existing contract, and making sure that any clauses included in your contract are valid and legally enforceable. Your lawyer will also be able to provide representation if you are being sued for breaching a contract, or alternatively, need to file a lawsuit against a lender for invoking an acceleration clause too soon.
In addition, your lawyer can inform you of your legal rights and can discuss other options for legal recourse aside from filing a lawsuit. Your lawyer can also walk you through the necessary steps of whichever legal procedure you decide to move forward with, including the processes for various methods of alternative dispute resolution.
Finally, your lawyer will also be able to assist you with devising a solid legal strategy to advocate or negotiate for inserting, enforcing, or invalidating an acceleration clause in your contract agreement.
