Due On Sale and Lease Options

I’ve come across a CFR (Code of Federal Regulations) specifically [Title 12, Volume 5] that defines the due-on-sale clause and events that will trigger it.

In it’s definition it talks about Leases with an option. Has anyone run into this, or has received a legal option on it?

Am I mis-inturpeting the CFR, or is a LeaseHold different then a Lease?

Hope these questions are not that stupid. I did a search on this forum but couldn’t find anything that answered my questions.

Thanks, Dave

CFR follows: (I’ve bolded the specific clause)

[Code of Federal Regulations]
[Title 12, Volume 5]
[Revised as of January 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 12CFR591.2]

[Page 446-448]

                   TITLE 12--BANKS AND BANKING



Sec. 591.2 Definitions.

For the purposes of this part, the following definitions apply:
(a) Assumed includes transfers of real property subject to a real 

property loan by assumptions, installment land sales contracts,
wraparound loans, contracts for deed, transfers subject to the mortgage
or similar lien, and other like transfers.``Completed credit
application’’ has the same meaning as completed application for credit
as provided in Sec. 202.2(f) of this title.
(b) Due-on-sale clause means a contract provision which authorizes
the lender, at its option, to declare immediately due and payable sums
secured by the lender’s security instrument upon a sale of transfer of
all or any part of the real property securing the loan without the
lender’s prior written consent. For purposes of this definition, a sale
or transfer means the conveyance of real property of any right, title or
interest therein, whether legal or equitable, whether voluntary or
involuntary, by outright sale, deed, installment sale contract, land
contract, contract for deed, leasehold interest with a term greater than
three years, lease-option contract
or any other method of conveyance of
real property interests.
(c) Federal savings association has the same meaning as provided in
Sec. 541.11 of this chapter.

[[Page 447]]

(d) Federal credit union means a credit union chartered under the 

Federal Credit Union Act.
(e) Home has the same meaning as provided in Sec. 541.14 of this
(f) Savings association has the same meaning as provided in Sec.
561.43 of this chapter.
(g) Lender means a person or government agency making a real
property loan, including without limitation, individuals, Federal
savings associations, state-chartered savings associations, national
banks, state-chartered banks and state-chartered mutual savings banks,
Federal credit unions, state-chartered credit unions, mortgage banks,
insurance companies and finance companies which make real property
loans, manufactured-home retailers who extend credit, agencies of the
Federal government, any lender approved by the Secretary of Housing and
Urban Development for participation in any mortgage insurance program
under the National Housing Act, and any assignee or transferee, in whole
or part, of any such persons or agencies.
(h) Loan secured by a lien on real property means a loan on the
security of any instrument (whether a mortgage, deed or trust, or land
contract) which makes the interest in real property (whether in fee, or
in a leasehold or subleasehold) specific security for the payment of the
obligation secured by the instrument.
(i) Loan secured by a lien on stock in a residential cooperative
housing corporation means a loan on the security of:
(1) A security interest in stock or a membership certificate issued
to a tenant stockholder or resident member by a cooperative housing
organization; and
(2) An assignment of the borrower’s interest in the proprietary
lease or occupancy agreement issued by such organization.
(j) Loan secured by a lien on a residential manufactured home,
whether real or personal property, means a loan made pursuant to an
agreement by which the party extending the credit acquires a security
interest in the residential manufactured home.
(k) Loan originated by a Federal savings association or other lender
means any loan for which the lender makes the first advance of credit
thereunder, Provided, That such lender then held a beneficial interest
in the loan, whether as to the whole loan or a portion thereof, and
whether or not the loan is later held by or transferred to another
(l) Real property loan means any loan, mortgage, advance or credit
sale secured by a lien on real property, the stock or membership
certificate allocated to a dwelling unit in a cooperative housing
corporation, or a residential manufactured home, whether real or
personal property.
(m) Residential manufactured home has the same meaning as provided
in Sec. 590.2(g) of this chapter.
(n) Reverse mortgage means an instrument that provides for one or
more payments to a homeowner based on accumulated equity. The lender may
make payment directly, through the purchase of an annuity through an
insurance company, or in any other manner. The loan may be due either on
a specific date or when a specified event occurs, such as the sale of
the property or the death of the borrower.
(o) State means the several states, Puerto Rico, the District of
Columbia, Guam, the Trust Territory of the Pacific Islands, the Northern
Mariana Islands, the Virgin Islands, and American Samoa.
(p)(1) A window-period loan means a real property loan, not
originated by a Federal savings association, which was made or assumed
during a window-period created by state law and subject to that law,
which loan was recorded, at the time of origination or assumption,
before October 15, 1982, or within 60 days thereafter (December 14,
(2) The window-period begins on: (i) The date a state adopted a law
(by means of a constitutional provision or statute) prohibiting the
unrestricted exercise of due-on-sale clauses upon outright transfers of
property securing loans subject to the state law creating the window-
period, or the effective date of a constitutional or statutory provision
so adopted, whichever is later; or
(ii) The date on which the highest court of the state rendered a
decision prohibiting such unrestricted exercise

[[Page 448]]

(or if the highest court has not so decided, the date on which the next
highest appellate court rendered a decision resulting in a final
judgment which applies statewide), and ends on the earlier of the date
such state law prohibition terminated under state law or October 15,
(3) Categories of state law which create window-periods by
prohibiting the unrestricted exercise of due-on-sale clauses upon
outright transfers of property securing loans subject to such state law
restrictions include laws or judicial decisions which permit the lender
to exercise its option under a due-on-sale clause only where:
(i) The lender’s security interest or the likelihood of repayment is
impaired; or
(ii) The lender is required to accept an assumption of the existing
loan without an interest-rate change or with an interest-rate change
below the market interest rate currently being offered by the lender on
similar loans secured by similar property at the time of the transfer.

[54 FR 49718, Nov. 30, 1989, as amended at 67 FR 60554, Sept. 26, 2002]

Unless I am wrong…and I’m not a legal expert, I don’t believe the loan can be called due in a lease option until the option to purchase is exercised. From everything I have ever seen or learned, the loan can’t be called due unless title is transferred. Title is not transferred in a lease option until the option to purchase is exercised. The current owner who originated the mortgage still owns the house until that point, so I don’t see how the due on sale clause has been violated.

I’m very very much a newbie, but I’ve recently read alot about L/O and I’m 99.99% sure (as your bolded part of the law shows) that just like with Sub2 it COULD be called and is a risk, but there’s a very small chance that it will be.

First, the lender would have to find out that a L/O is in place. Second, they would have to want to pursue it.

As long as the payments are being made on time there shouldn’t be any problem.

I’m curious as to how they can call the loan due if title doesn’t transfer? Any answers would be appreciated.

Regards, Tony

OK, I’ve talked to two attorneys and here is what I found out: (of course these were over the phone opinions)

  1. The CFR I posted was intended to override any state law that did not have “due-on-sale” regulations or regulations which purported to invalidate due-on-sale clauses.

  2. There are two clauses to look for: a) “Due-on-Transfer” and b) “Due-on-Sale” the latter is discussed in the CFR. Due-on-Transfer is a broader clause.

  3. The 1st attorney (btw they were both real-estate attorneys) told me that it would be highly unlikely for banks and mortgage lenders to see LO’s because (depending on how you structure your agreements) the lender has no way of knowing, since the taxes and insurance are being paid by the borrower on the loan, unless the lender were to routinely audit all of the recorded documents, which to my knowledge they don’t.

  4. The 2nd attorney stated that until the option is EXCERSIED no sale or transfer has taken place.

MY CONCLUSION: LO will trigger Due-on-Sale clauses or Due-on-Transfer WHEN the option is exercised by signing and recording the Purchase and Sale part of the transaction.


If the lease is for more than 3 years the federal law says its a sale and the lender can accellerate the loan. The tax advantages can even be tranferred to the leasee for these longer leases because the IRS treats it as a sale too.

The way the lender finds out is the through the fire insurance… as long as the fire insurance stays in the owner’s name you are OK.
the leasee should purchase a renter’s insurance policy separately.