Bischoff, Morgan and King.
This appeal concerns the validity of so-called "due on transfer" clauses frequently found in mortgage notes and the conditions of their enforcement. Also involved is the essentially factual issue concerning the construction of the clause found in the mortgage note which purports to specify its date of maturity in terms of the date on which "building permits shall become available for construction upon the premises * * *."
The facts appear to be without substantial dispute except for those pertinent to interpretation of this latter clause. In late 1972 plaintiff Fidelity Land Development Company offered the premises in question, a 315-acre tract of undeveloped land, to a Solomon Rieder, president and principal stockholder of defendant company. Plaintiff had purchased the property shortly before the offer from Benjamin and Clayre Abramson in exchange for a $700,000 mortgage which, at all times pertinent to this matter, encumbered the property. The record is silent as to whether or not additional consideration was paid.
A bargain was struck for a total purchase price of $1,000,000 although no contract of sale was ever prepared. At the closing which took place on January 29, 1973 defendant company executed a mortgage in plaintiff's favor and a series of four promissory notes dated January 5, 1973, all prepared by plaintiff. The first three notes were for $25,000 each and have since been paid. The fourth note in the amount of $190,000 is the one upon which this suit is based. It provided that the principal sum thereof with interest was to be paid at "such date as building permits shall become available for construction upon the premises which are the subject of a mortgage of even date as hereinafter described." It further contained as a condition for acceleration thereof the "due on transfer" clause at issue here which reads as follows:
Notwithstanding the foregoing, the unpaid balance of the principal sum of this note and interest hereon shall immediately become due and payable, at the election of the holder hereof, in the event of:
c. Any change in the ownership of the mortgaged property * * *.
An addendum to the mortgage note limited plaintiff's recourse, in the event of a default in its payment, to the mortgaged land itself, immunizing the principals of the defendant mortgagor from any liability thereon. The principal sum was to bear interest "from such time as building permits shall be available for construction upon the premises, the subject of said Mortgage and Note."*fn1
The mortgage was in the amount of $265,000. It again provided in the same terms as those contained in the note and the addendum thereto that after payment of the three $25,000 notes, the balance, represented by the fourth note, "shall be due and payable at such time as building permits shall be available for construction upon the premises * * *."
At the time of the closing, January 29, 1973, both parties were aware of the imminence of a building moratorium which, in fact, was imposed only two weeks after this transaction closed and remained in effect for about a year. The moratorium governed major construction in Pemberton Township and during its continuance no developer was permitted to make application for major subdivision approval. There is no question but that defendant's plans for the land it was purchasing, involving construction of approximately 1000-1500 units in a planned residential development, known to all, were covered by the moratorium, and that while it was in force no applications for building permits would even be received by the township. Indeed, it was the parties' awareness of the imminence of this moratorium which led to the inclusion of the clause delaying maturity which is at issue in this case.
At the closing the $1,000,000 purchase price was accounted for by a $35,000 cash payment, assumption of the Abramson mortgage in the amount of $700,000, and execution of the four notes and the mortgage in the amount of $265,000. The deed from plaintiff to defendant dated January 5, 1973 was recorded February 2, 1973.
On February 5, 1973, three days after recordation, the corporate defendant transferred the deed to the premises to Rieder, its principal stockholder. This transfer was accomplished at Rieder's request for tax purposes on the advice of his accountant. The only consideration mentioned was in the amount of $1 and the deed, subject to both the Abramson mortgage and the mortgage from defendant to plaintiff, was not recorded until January 28, 1974, almost a year after the transfer. It is this transfer of February 5, 1973 which, according to plaintiff's contention, accelerated the due date of the note.
Suit on the note, however, was instituted on May 10, 1974; being unaware of the transfer which had occurred, plaintiff did not allege this conveyance in its complaint as the basis of acceleration. In fact, the complaint simply alleged that the note was due. When defendant, during the pendency of the suit, became aware that plaintiff regarded the transfer of the deed as a basis for acceleration, a retransfer of the deed was arranged. The corporate defendant received this conveyance from Rieder on April 15, 1975. ...