California Real Estate Salesperson Exam Practice - Question 68

Question

The phrase in a loan contract that specifies "all due and payable upon the happening of a certain event" would be classified as: 

Selections

A. An exculpatory clause

B. An escalator clause

C. A release clause

D. An acceleration clause 

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Answer: D

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5 Keys Summary

• The phrase "all due and payable upon the happening of a certain event" precisely describes an Acceleration clause.

• An Acceleration clause is a condition in a financing instrument that grants the lender the power to declare all outstanding debt sums immediately due and payable upon the occurrence of a defined event or default.

• Such an event could be a breach of the loan terms, such as failure to make timely installment payments, failure to pay property taxes, or failure to maintain insurance, as these threats compromise the lender's collateral security.

• A "due on sale" clause (or alienation clause) is a specific type of acceleration clause, which is triggered by the transfer or sale of the property securing the debt.

• An Escalator clause allows for the upward or downward adjustment of payments or interest rates, an Exculpatory clause relieves a party from liability, and a Release clause allows a specific parcel of property to be removed from a blanket lien, none of which involve making the entire debt immediately due.

Explanations

The phrase "all due and payable upon the happening of a certain event" precisely describes an acceleration clause.

• An acceleration clause is a provision in a real estate financing instrument that grants the lender the right to demand the full outstanding debt immediately if the borrower violates any of the loan agreement's provisions. This action is also referred to as "accelerating the loan," "calling the loan," or a "call provision". For example, failure to pay property taxes or insurance, which could threaten the lender's collateral, might trigger this clause. An alienation clause (due-on-sale clause) is a specific type of acceleration clause that allows the lender to call the loan due if the property's title is transferred to a new buyer without the lender's permission.

The other options do not fit this description:

• An exculpatory clause typically relieves a party from liability for certain issues.
• An escalator clause (or escalation clause) allows for an increase in payments, such as rent or interest rates, often tied to an index, but does not make the entire loan due.
• A release clause is found in a blanket mortgage and permits the borrower to release a specific parcel of land from the mortgage after repaying a certain portion of the debt.

Concepts Definitions

• Acceleration Clause: A contractual provision in a loan agreement giving the lender the right to declare the entire unpaid balance of the loan immediately due and payable if the borrower defaults on specific terms, such as missing payments.
• Exculpatory Clause: A clause that relieves one party from liability for certain actions or events, typically absolving them from responsibility for damages or losses.
• Escalator Clause (Escalation Clause): A provision, often in a lease or loan, that allows for an increase in payments or interest rates based on predetermined factors or an index.
• Release Clause: A provision in a blanket mortgage that allows for the partial release of specific collateral (e.g., individual parcels of land) from the mortgage lien as portions of the loan are repaid.