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Fogel v. S.S.R. Realty Associates

Decided: December 1, 1981.


Gibson, J.s.c.


This is a mortgage foreclosure action. Plaintiff-lender claims that a sale of the premises by the mortgagor to a third party without his consent created a breach of the mortgage agreement and justified an acceleration of the full principal balance. Mortgagor claims that the mortgagee unreasonably withheld his consent to the transfer and therefore has no right to foreclose. Cross-motions for summary judgment have been filed. R. 4:46-2. Required by these motions is a re-examination of the enforceability of a so-called "due on sale" clause.

Since all parties agree that the material facts are not in dispute, the case may be decided as a matter of law. The facts indicate that on January 4, 1978 defendant S.S.R. Realty Associates purchased from plaintiff property located in Atlantic City. The sale was financed in part by a purchase money mortgage amounting to $224,000, with interest to run at 9% a year. As part of the loan documents the parties agreed to the following language relating to the possible sale of the mortgaged premises:

Mortgagor may assign, deed, or otherwise transfer the mortgaged premises without causing an acceleration of the installments due hereunder; provided, however that the transferee assumes the obligations contained herein and in the mortgage secured hereby. Mortgagor, however, shall not assign deed, or otherwise transfer the mortgaged premises without obtaining the prior approval of the Mortgagees, which approval shall not be arbitrarily or unreasonably withheld.

Sometime during the latter part of 1980 mortgagor entered into negotiations to sell the property to defendant Boardwalk Regency Corporation. In keeping with the loan agreement a letter was directed to plaintiff seeking his consent to the sale, with the understanding that the buyer would assume the obligation on the bond and mortgage. Plaintiff refused to consent unless

there was an upward adjustment in the interest rate. Believing plaintiff's position to be a breach of the mortgage, defendants refused to agree to the interest adjustment and proceeded to complete the sale. Title was transferred on January 8, 1981. Plaintiff in turn declared the sale a breach of the mortgage and called for an acceleration of the principal amount due. This action was instituted on April 24, 1981.

By this motion plaintiff argues that the quoted mortgage provision is enforceable as a so-called "due on sale" clause and that the transfer justifies the acceleration. Defendants contend that the language is not a "due on sale" clause because it permits the transfer of the premises subject only to plaintiff's approval, which approval is not to be unreasonably withheld. Since the proposed buyer was of impeccable financial standing, they argue that plaintiff's refusal to approve the sale was unreasonable. Plaintiff admits that his security would not be impaired by the transfer but it is his position that his ability to withhold consent was not limited by such a standard and he could legitimately include a demand for an increased interest rate.

The resolution of these conflicting positions requires a careful examination of the contractual language as well as the case law dealing with similar provisions. Considerable attention has been given to the interpretation and enforceability of so-called "due on sale" clauses, not only in New Jersey but throughout the country. See Annotation, "Acceleration Clause -- Transfer of Property," 69 A.L.R. 3d 713 (1976); Volkner, "The Application of the Restraints on Alienation to Real Property Security Interests," 58 Iowa L.Rev. 747 (1973). The most recent treatment by an appellate court in New Jersey is found in Fidelity Land Dev. Corp. v. Reider & Sons , 151 N.J. Super. 502 (App.Div.1977). The analysis contained there is instructive.

Contract clauses accelerating the due date of a given obligation on the occurrence of a specified event are generally considered valid contractual terms. . . Clauses accelerating an obligation on a transfer of ownership, variously termed "due-on-sale" clauses, "due-on-encumbrance" clauses, or simply

"due-on" clauses, similarly have been generally upheld against contentions that they operate to restrict the right of alienation. . . Neither party to this matter even argues that the clause in question is facially invalid.

Such clauses have as their obvious purpose the protection of a lender's security for an obligation and his need to have a borrower known by him to be conscientious, experienced and able. A lender may legitimately fear that any new buyer, unknown to and unapproved by him, may permit the property securing the debt to become rundown and depreciated in value, thus compromising his ability to secure repayment of the debt. . . It is the legitimacy of such reasons that have led the court to approve such clauses as being reasonable restraints upon the alienation of real property. Controversy has arisen, however, with respect to the conditions in which such clauses will be enforced. At the risk of some oversimplification, it can be stated that there has emerged two general lines of authority. One view tends to the automatic enforcement of such clauses without regard to whether the underlying purposes of the clause have been frustrated. . . Several recent New Jersey cases have apparently accepted that view. . . The other ...

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