Alienation Clause (Contract) – Definition

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Alienation Clause Definition

An alienation clause is used in mortgage contracts, especially in commercial real estate. An alienation clause enables a lender to request the repayment of a mortgage in full if the collateral property or asset used for the mortgage is sold or transferred to a third party. An alienation clause triggers a ‘due and payable’ effect in the course of a collateral being sold or transferred. This clause can also be used  in property insurance contracts and other types of financial contracts.

Usually, an alienation clause is a provision that is included in a trust deed or mortgage, this clause comes into effect when the ownership of the property changes.

A Little More on What is an Alienation Clause

Loans, financial contracts and mortgages contain the alienation clause. This clause protects the lender in the event of a property being sold or transferred to another party. According to the alienation, a lender can declare a mortgage or loan due and payable when the owner sells the property or transfers it to another party.

Mortgage lenders do not omit the alienation clause when entering a contract or an agreement with a borrower. This clause guarantees the repayment of debts in the event of a borrower selling or transferring the property used as collateral for the loan. This provision requires that a borrower pays his debt in full before the property is sold or transferred to a third party.

Mortgage Alienation Clause Considerations

Although alienation clauses are used mostly for commercial mortgages, many lenders include them in residential mortgages. An alienation clause is a provision that enables a lender to demand the full repayment of a borrower’s debt if the property used for the mortgage is transferred to another party.

Not all mortgages contain an alienation clause, this means that the mortgage owner can sell or transfer the property. Such a contract is an assumable mortgage contract.  In an assumable contract, an owner can sell the property based on agreement that the debt will be repaid to the lender on an agreed schedule or repayment plan.

In most cases, lenders do not  go into assumable mortgage contracts because such contracts give no room for an alienation clause. This is not favorable to lenders because it means a borrower can sell or transfer the property despite the existing debt. Borrowers benefit from assumable mortgage contract because it offers them a simplified repayment plan and schedule. Lenders are protected from unpaid debt through the provision of an alienated clause. Original borrowers are required to pay their debt in full before they can sell or transfer the property.

Alienation Clauses in Insurance

Alienation clauses are also included in insurance contracts whether it is a residential and commercial property insurance contract. An alienation clause has a different meaning in the context of an insurance contract as against that of a mortgage contract. In insurance contracts, alienation clauses relieve a policyholder from paying insurance on a property if the property is sold or transferred. This means that the new owner of home needs to purchase a new insurance on the home.

Reference for “Alienation Clause”

https://www.investopedia.com/terms/a/alienation_clause.asp

https://www.thebalance.com › Personal Finance › Home Buying › Basics

https://www.bankrate.com/glossary/a/alienation-clause/

www.businessdictionary.com/definition/alienation-clause.html

www.regencyrealestate.com/2018/03/26/alienation-clause-real-estate/

Academics research on “Alienation Clause”

Stabilization clauses in natural resource extraction contracts: legal, economic and social implications for developing countries, Oshionebo, E. (2010). Stabilization clauses in natural resource extraction contracts: legal, economic and social implications for developing countries. Asper Rev. Int’l Bus. & Trade L., 10, 1.

Correctly Interpreting Long-Term Leases Pursuant to Modern Contract Law: Toward a Theory of Relational Leases, Johnson Jr, A. M. (1988). Correctly Interpreting Long-Term Leases Pursuant to Modern Contract Law: Toward a Theory of Relational Leases. Virginia Law Review, 751-808.

Due-on-Sale Clauses: The Economic and Legal Issues, Kinzler, T. M. (1981). Due-on-Sale Clauses: The Economic and Legal Issues. U. Pitt. L. Rev., 43, 441.

Stabilization clauses and the evolution of environmental standards in foreign investment contracts, Cotula, L. (2007). Stabilization clauses and the evolution of environmental standards in foreign investment contracts. Yearbook of International Environmental Law, 17(1), 111.

Allocation of decision and ownership rights in franchise relationships, Windsperger, J. (2002). Allocation of decision and ownership rights in franchise relationships. Journal of Marketing Channels, 10(2), 19-38.

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