Under what circumstances is a due on encumbrance clause enforceable?

A due on encumbrance clause is enforceable when it is reasonable under the specific circumstances surrounding the transaction. This type of clause allows a lender to demand the full repayment of a mortgage if the property owner encumbers the property with additional financing or a lien. Reasonableness in this context typically involves evaluating factors such as the nature of the encumbrance, the borrower's financial status, and the potential risk to the lender.

When determining enforceability, courts often consider whether the enforcement serves a legitimate business interest of the lender, such as protecting the collateral value of the property or ensuring that the borrower’s financial obligations remain manageable. Thus, if a borrower encumbers the property in a way that significantly increases the lender's risk, the due on encumbrance clause can be enforced. In this regard, a blanket enforceability without restrictions could potentially lead to unfair situations for borrowers, while asserting that it is never enforceable can ignore a lender's right to protect its loan.

On the other hand, conditions that are solely based on high-risk transactions or that define the clause as never enforceable overlook the legal framework that supports its application, thus affirming the necessity for a reasonable basis for enforcement.