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Due on Sale Clauses: What they Are, and Why You Need to Understand Them

A few weeks ago, I received a phone call from a potential client looking for assistance with a real property matter. The conversation started with the typical vague inquiry of “do you do deeds, and how much”? I answered with the equally typical, equally vague, “Depends. What’s the situation”? After spending a few minutes in conversation, I grasped the following situation. My future client (Let’s call her Dolores), lives in a home on San Antonio’s south side near I-37 and Southcross Boulevard. She purchased the home about 10 years ago, with a significant other. While the two cohabited and had a child, they never married, and were named on the warranty deed as “single individuals.” That means that, while they own the home jointly, it is not community property, and they both have distinct, separate ownership rights. Also noteworthy is the finance situation. Instead of working with a traditional bank for a conventional mortgage, the deal was seller-financed. In exchange for title to the home, the buyers granted a deed of trust and promissory note directly in favor of the sellers. While the seller-financed method can be a good deal for those with poor credit or other disqualifying factors, it also bypasses title searches and opens up the buyer to a myriad of potential consumer fraud risks. To sum it up, Dolores and her former partner were responsible for making their monthly mortgage payments directly to the seller (which in this case was a Family Trust) or risk foreclosure.

Now that we’ve discussed the case background, let’s turn to what Dolores needed from me. Soon after the purchase of the home, Dolores and her significant other had a falling out, and he left her alone in the home to continue payment and care for their child. Fast forward to today, and you will find that Dolores has continued living in the home, diligently caring for it and paying the mortgage every month. She recently found out that she qualified for programs offered by the City of San Antonio whereby her roof and windows would be replaced at no cost to her. All the City needed was proof of ownership. After examining the title documents, you can imagine Dolores’s dismay when she learned that, despite her sole payment and upkeep, her former partner still had a half-interest in the home. In order to qualify for the city services, she would either need to change title to solely her name, or receive her former partner’s permission. Likewise, any future sale of the home would result in Dolores only receiving half the proceeds. That brings us to Dolores’s decision to call me. Having convinced her former partner to consolidate title in her name, they just needed an attorney to draft the right documents and ensure proper execution and recordation.

I told her that I would be happy to help, but strongly recommended that we review the original sale documents before any significant action. Just as I suspected, in Paragraph 18 of the General Provisions Section of the Deed of Trust, I found verbiage constituting a “due-on-sale” clause. This clause essentially states that if any conveyance of the property occurs without express consent of the promissory note holder (the seller in this case), they can call the entire mortgage due at that time. Only about halfway through the mortgage’s amortization schedule, a bad conveyance could have put Dolores on the hook for tens of thousands of dollars. Luckily for Dolores, this particular due-on-sale clause exempted transfers “between the makers”. In other words, while they would typically need the seller’s consent to make a subsequent title transfer, they did not need it in this case because it was between the two “makers”, or obligors, of the promissory note.

Even though the deed of trust allowed Dolores’s title transfer to occur without anyone else’s permission, I still recommended we reach out to the note holders to ensure a smooth transaction. As I mentioned before, seller-financed deals mean no conventional banks or title companies are used, and buyers are often more vulnerable to fraud or abuse. The first person I called was the trustee of the deed of trust, a fellow attorney who had drafted the original documents and facilitated the sale. He understood and agreed with what we were doing, but still recommended following up with the seller. The conversation with the seller did not go as well as with the trustee. The representative I spoke to was seriously concerned with my client's ability to make the mortgage payment on her own. When I explained that it was in fact Dolores who had been paying the mortgage all these years, she essentially called Dolores a liar and insisted that the man must have been paying the bills. After a largely unpleasant conversation, I finally informed the representative that my client had every right to engage in the proposed conveyance, and my communication was really just a courtesy. Despite the unpleasantries, it is generally better practice to utilize open and thorough communication than to simply hope other parties understand what you are doing and the legal justifications for it.

In this case, the due-on-sale clause ended up being a non-issue, and we were successful in drafting, executing, and recording a new deed that consolidated title in my client’s name. She is now the sole owner of her home, and all her future mortgage payments will contribute to her equity in the home. Despite the happy ending, this case highlights some of the pitfalls that can occur in real-estate transactions, even one so seemingly simple. Many deeds of trust do not contain the “maker” exception in their due-on-sale clause. Had the exception not been present here, or had Dolores wished to convey the property to a third party, the conveyance could have been a huge, costly mistake for all those involved. Even with a good conveyance, had we not engaged the trustee and seller to inform them of the situation, Dolores could have set herself up for a foreclosure action by an angry, distrusting note holder. Even if proved wrongful, such suits can be very stressful and costly. The bottom line is, no matter how simple a real estate conveyance may seem, it is never a good idea to engage in real property title transfers without consulting a knowledgeable Texas real-estate attorney.


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