Transferring Real Property with Due on Sale Clauses

Asset protection plans that involve real estate include transferring title to real estate parcels to one or several newly created limited liability companies. When the real property being transferred to the LLC is subject to a mortgage these title transfers for asset protection purposes raise the issue of so-called “due on sale” clauses in the mortgage agreement.

Clients are often afraid that their asset protection transfers to an LLC will cause their mortgage lender to accelerate the note and mortgage because the mortgage document states that the note is due in full any time title to the property is changed.

When an owner changes title to property to a new entity owned by the same owner where the owner remains liable on the note and there is not diminution in the value of the loan security, there is no additional risk or harm to the lender. In such cases, a due on sale clause amounts to an adhesion contract and arguably a restraint on trade. In any event, as a practical matter, lenders rarely, if ever, detect or enforce a due on sale provision where the borrower changes title to an entity he controls where there is no change in the underlying security.

The only way a lender could detect a change in property ownership to the client’s own LLC would be if the lender saw the change on the property insurance policy or the real estate tax records. Again, practically, lender rarely would investigate these documents so long as the loan is performing. I have helped clients transfer properties they own individually to other entity names for many years, and I have never experienced a lender even questioning the transfer.

I have never heard of any case where a performing loan was called because of a title change for estate planning or asset protection purposes. I believe it is neither illegal nor immoral to assist clients with these planning changes in title because they cause no harm to the lender. If anything, protecting the borrower from liability protects the client’s assets that are the basis of his ability to repay loans. In sum, the risk of a conveyance to an LLC causing loan acceleration is very small.

Where the loan amount is large or where clients are conservative, most banks will grant permission in advance of a title transfer for planning purposes. The best plan is to buy investment property in the name of an LLC or partnership so subsequent title transfers are unnecessary.