In some agreements with banks (and hard money lenders) concerning the funding of commercial real estate you may come across the Due for No Reason clause. It means just that: the lender can call your loan due at any time, for no reason. Think it won’t happen? Think again. During the Loans and Savings crisis in the 1980s, it happened a lot. It can happen to you. Some lenders have been calling due commercial loans even though they have been serviced timely, by redefining them as non-performing. How can this happen? With falling real property prices, the bank might conclude that the security is insufficient and this alone can be grounds for calling the loan due.
A demand clause
A demand clause is better for the lender than an acceleration clause. An acceleration clause allows the lender to call the loan if the borrower violates some contractual provision, such as a requirement that the loan must be repaid upon sale of the property. The lender requiring a demand clause will no doubt disavow any intention of behaving in such a manner
A demand clause allows the lender to demand repayment for any reason. It protects the lender against having low-rate loans assumed by home buyers in a rising rate market just as effectively as a due on sale clause. But in addition, a demand clause permits the lender to raise your interest rate in a rising rate market even when you aren’t selling your house. The lender can force you to accept a higher rate by threatening that if you don't agree, the loan will be called. The Truth in Lending Disclosure has a statement that reads “This loan has a demand feature,” which is checked “yes” or “no.” Some lenders will check “yes”, even though the note has an acceleration rather than a demand feature. Nonetheless, if it is checked “yes”, you want to examine the relevant sections of the note.
How to Secure Your Commercial Loans and Protect Yourself from Lender’s Abuse
Do your homework. Read the fine print and have an experienced real estate attorney review it. Negotiate with more than one or two banks. It will cost you time but save you a lot of headache. Plus, don’t pyramid loans if you can help it. Pyramiding (not only in these market) exposes you and could bite you really bad.
But what if you have a loan with a twist already? Prepare yourself for the worst-case-scenario as good as you can. Line up a second, a third, a tenth lender in advance of the expected due date. Build relationships with several banks, now.
