Alienation of any property means selling the property or transferring the right to any other person. Alienation clause is a clause that creates a limitation on the right to alienate the property. This Buzzle article explains this clause.
An ‘alienation clause’ is a restrictive clause used in mortgaged property loans, lease agreements, or insurance contracts. Almost all mortgage contracts today contain an alienation clause.
A contract is an agreement that is legally enforceable as per the respective laws of the state/nation. Every contract has clauses that stipulate the terms and conditions to which the arrangement or the agreement between two or more parties is subject to. If you’re dealing in real estate, particularly, you should have knowledge of an alienation clause.
Definition of Alienation
Alienation of any property means either selling it off to someone or transferring the interest in the property to someone else. Alienation clause has been introduced to protect the lender’s interest in case the property is transferred without his knowledge or permission. Thus, this clause can limit or prohibit the borrower from selling off the asset.
Loan Alienation Clause
In a mortgage, a loan alienation clause will specify, that the mortgagor (borrower) cannot sell the mortgaged property without the consent of the mortgagee (lender). If he decides to sell the property, he has to pay the outstanding loan amount along with interest and other charges applicable.
One can alienate a property in a lease in either of these ways:
➜ Transferring the lease
➜ Under-letting the lease
➜ Sharing occupation of the lease
An alienation clause in a lease agreement will stipulate the terms and conditions which the alienation in that lease will be subject to. It might prohibit alienation of the lease in entirety, or stipulate that permission of the lessor is necessary before alienating the property.
In respect to insurance, an alienation clause means that the property loses its insurance cover once the property is sold off.
Alienation Clause vs. Acceleration Clause
Though both these clauses relate to the foreclosure of a mortgage loan clause, acceleration clause should not be confused with alienation clause. An acceleration clause is usually attracted when the mortgagor is making defaults in payments, or the happening of any other specified event. Other events can be not adhering to the terms and conditions of the loan agreement, insolvency, non-payment of taxes, etc.
It is at the discretion of the lender whether to invoke the acceleration clause immediately or not. Once it is invoked, the borrower has to repay the outstanding amount of the loan so as to avoid foreclosure. As the name suggests, it ‘accelerates’ the repayment of the loan.
As buyers, it is necessary to know whether there are any encumbrances on the property. As sellers, be vigilant about the mortgage clauses, and take due steps to avoid any legal action. The alienation clause protects lenders, and hence, is a necessary clause in contracts especially dealing with real estate. Further, make yourselves aware of the real estate and contract laws before taking or lending any loan. Seek legal help if required.