An acceleration clause is a provision in a contract that allows the lender of the contract to demand the payment of the total outstanding balance if the borrower breaches the contract, such as missing a payment or delay in payment.
Acceleration clauses in contracts are common among mortgages and leases. Acceleration clauses require full performance if the contract is breached. For example, if your contract has an acceleration clause then you could be responsible for paying the full amount of your loan or rent if you miss a payment or break the contract in some other way.
When Is An Acceleration Clause Used?
Acceleration clauses are common in many mortgages, deed of trusts, leases, liens, and other types of loans when payments are due. Acceleration clauses usually kick in when there is a failure of payment or a cancellation of a contract by someone who owes money to the lender. It is served as a type of penalty when there is a default in payment.
If I Breach the Contract, How Likely Is It That An Acceleration Clause Would Be Used Against Me?
Lenders who use acceleration clauses to guard against contract breaches fear that the borrower will damage the property in a way which might lessen the value of the property. There are different ways that an acceleration clause can be used:
Mortgages: Lenders will also use acceleration clauses as the first step for a foreclosure on a defaulting borrower. Courts are willing to enforce the use of acceleration clauses in mortgages because the borrower has already gotten what they wanted from the contract, the house, while the lender has not yet received full payment for the house.
Lease: In landlord-tenancy relations, the situation is reversed. The tenant will not have the full value of the contract if an acceleration clause is used because the tenant has not stayed on the property for all the future rent. For example, an accelerated rental payment might be $4,000 for two years but the tenant has only stayed on the property for one year. The landlord would be getting $2,000 for nothing if the tenant decides to move out rather than stay. As a result, acceleration clauses are not explicitly called so in leases or on eviction documents. Landlords are more likely to ask for damages as compensation for what the landlord lost than accelerated rent.
Promissory Note: IF someone gives another person a loan that is secured by a promissory note, the lender of the loan can include a provision in the note that gives the option to collect the entire balance if there was a default in payment.
What Should I Do If My Contract Is Accelerated?
Most states require notice if payment for mortgage or rent has been accelerated. This notice also represents a grace period that will give the borrower or tenant time to gather the demanded funds.
The acceleration is subject to all normal rules of contract rule, so lenders or landlords can waive the enforcement of an acceleration clause through word, action, or inaction.
If your contact is subject to an acceleration clause and you cannot pay or fully perform then you may want to consider contacting a lawyer who specializes in contract disputes.