Due-on-sale clause in mortgages

[novice_buyer]

What is the name of your state (only U.S. law)? Massachusetts

Is the Due-on-sale clause already on all mortgages and can be activated when the percentage interest on a condo is reduced?

Or is it not on mortgages but is placed on them only when the percentage interest is reduced?

Let me explain a bit further.

If a person (not me) in a condo building wants to add common area space to their unit, they have to have the Master Deed amended (not an easy task).

Someone told me that one of the things that needs to get done to amend a Master Deed is to get the mortgage companies, for the other condo owners in the building, to sign off on the fact that the ownership interests in the condos on their loans will now be reduced. I understand that banks are reluctant to do this and that somehow the Due-on-sale clause is related to this (or can be applied to this situation).

Has anyone heard anything about this?

 

[justalayman]

A due on sale or transfer clause is not present in all mortgage loans. One would have to read the mortgage documents to determine if there is a due on sale clause.

Regardless, it is exactly what it says: if any of the property held as a lien against the mortgage loan is transferred it allows the lender to invoke the due on transfer clause and call the note due. There is no magic number percentage that applies. It is applicable to any and all of the property held as security interest for the loan. If one wishes to alter the ownership of the property in any way (barring the exceptions in place under the Garn St. Germain Act) one must have the approval of the mortgage lender. Otherwise they could invoke the due on transfer clause and call the note due.


The problem in what you are doing is a "new" owner of the property is not a party to the mortgage itself. That causes the lender problems should they need to foreclose on the property. It also alters the value of the property they hold as security interest against the loan. Yes, what would typically need to be done is have the approval of any mortgage lender involved if it results in an alteration in the property description held as security interest by any mortgage lender. Otherwise it could allow the individual mortgage lenders to invoke any due on sale clause in place.

 

[novice_buyer]

justalayman,

It's fascinating to see how the different pieces fit together in condo real estate matters. The only problem for me is that I find it very difficult to understand legal terms and phrases.

But if I understand you correctly, you are saying that if a condo's size in a building is altered all the lenders in that building must be notified for approval. This is because if one condo gets more in size, it means that the others condos must have given up something, either their actual square footage or their common area. Am I correct so far?

And if a mortgage has a Due-on-sale clause that particular lender can demand to have the loan paid up in full immediately. Am I correct? But does this mean that if there's no Due-on-sale clause the lender cannot do anything?

Also, typically who notifies the lender when there's a change in a condo size? The individual owner or is this something that is definitely better handled by a person's lawyer?

By the way, the person trying to acquire this common area space is not a new owner. This person has been in the building for around 10 years.

 

[festival]

The solution is to not increase the ownership interest of the owner's unit, since that is way too complicated. Find another way for that owner to purchase this piece of the common area as separate real estate, and spell out all the boundaries, maintenance issues and dues for this separately from being part of a unit that has ownership interest. Although this is complicated in itself, it is a whole lot easier than trying to change the percentages of ownership interest.

 

[festival]

The solution is to not increase the ownership interest of the owner's unit, since that is way too complicated. Find another way for that owner to purchase this piece of the common area as separate real estate, and spell out all the boundaries, maintenance issues and dues for this separately from being part of a unit that has ownership interest. Although this is complicated in itself, it is a whole lot easier than trying to change the percentages of ownership interest.

This is from an older thread that has some similarity:

You and the association will need a real estate lawyer, preferably one with experience in condominiums.

The association will need to give you a deed to this area, with precisely defined boundaries, and a description/drawing by a licensed architect, licensed engineer, or licensed surveyor. The description can be similar to the description of one of your condominium units in the Declaration. Include as much detail as possible, such as who owns the door (inside and out), wallboard, studs, flooring, sub floor, paint, etc. Consider who will maintain and repair what parts of the room in case of damage such as fire – that may be used to determine the exact description of what you will own. In some condominiums, you only own the paint and the space.

You may wish to keep this area legally separate from your condo, since legally combining it with your unit may be far more trouble than it is worth.

Legally changing unit boundaries requires an amendment of the Declaration. I found this in MN law 515A.2-119 AMENDMENT OF DECLARATION. (c) "...no amendment may...change the boundaries of any unit...in the absence of unanimous written agreement of the unit owners and holders of an interest as security for an obligation." I'm not from MN, and I can't judge the applicability of this law, but it seems pretty clear.

In your association, do larger units pay a higher monthly fee, or are all units equal? This brings up issues of modifying the unit's percentage of ownership interest.

Like I say, keep it legally separate as two properties?

Your declaration probably contains a provision that the sale of common elements requires approval by a large majority of owners. The board probably does not have authority to sell common elements without this approval. You and your attorney need to read your declaration from beginning to end for anything related to this sale. The sale of common elements may also be in MN law.

Ideally, the declaration should be amended to reflect the reduction of common element area.

You also need to obtain permission in writing from the board to modify the building. Keep this paper. I would also make a copy of all of the association's votes, board minutes, letters, etc. Don't rely on the association to keep these records.

Once you get all these details worked out, it is mostly a matter of drawing up the papers and taking the appropriate vote(s) of the owners (amending the declaration, etc.).

 

[novice_buyer]

Festival,

Thanks for your interesting feedback.

The reason I started this thread is that I'm one of the three trustees in our condo association. So I'm trying to figure out what is the proper role I should be playing for the association, what potential problems lie ahead, what issues I should be concerned with, etc. To complicate matters a bit, the person proposing to take over the common area is one of the trustees. But this person has recused herself/himself (trying to protect their identity as much as possible) from their trustee role in this matter.

My understanding so far is that I'm supposed to look out for the condo association's interest and the unit owners as a whole. Right?

At some point we (the other trustee and I) will have to consult a lawyer, from the way things look. I'm holding off from doing this for now so that I can confirm whether this person, who wants to take over the common area, will actually decide to go ahead with their proposal. So far, things are still at the exploratory stage.

From my googling, it seems like allowing individual units to take over common areas is frowned upon since it requires amending the Master Deed which is not an easy thing. Am I right?

By the way, does allowing a unit owner to take over a common area affect the title insurance of all the other unit owners in the building, or just the unit owner getting the common area, or no one at all?

Once again, thanks for your feedback.

The solution is to not increase the ownership interest of the owner's unit, since that is way too complicated. Find another way for that owner to purchase this piece of the common area as separate real estate, and spell out all the boundaries, maintenance issues and dues for this separately from being part of a unit that has ownership interest. Although this is complicated in itself, it is a whole lot easier than trying to change the percentages of ownership interest.