Question
nnnnThe phrase in a loan contract that specifies “all due and payable upon the happening of a certain event” would be classified as:
nnnnSelections
nnnnA. An exculpatory clause
nnnnB. An escalator clause
nnnnC. A release clause
nnnnD. An acceleration clause
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Answer: D
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5 Keys Summary
nnnn• The phrase “all due and payable upon the happening of a certain event” precisely describes an Acceleration clause.
nnnn• An Acceleration clause is a condition in a financing instrument that grants the lender the power to declare all outstanding debt sums immediately due and payable upon the occurrence of a defined event or default.
nnnn• Such an event could be a breach of the loan terms, such as failure to make timely installment payments, failure to pay property taxes, or failure to maintain insurance, as these threats compromise the lender’s collateral security.
nnnn• A “due on sale” clause (or alienation clause) is a specific type of acceleration clause, which is triggered by the transfer or sale of the property securing the debt.
nnnn• An Escalator clause allows for the upward or downward adjustment of payments or interest rates, an Exculpatory clause relieves a party from liability, and a Release clause allows a specific parcel of property to be removed from a blanket lien, none of which involve making the entire debt immediately due.
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