Finance:Acceleration clause

An acceleration clause —or acceleration covenant— in the law of contracts, is a term that fully matures the performance due from a party upon a breach of the contract. Such clauses are most prevalent in mortgages and similar contracts to purchase real estate in installments.

Suppose, for example, the contract was for A to purchase Blackacre from B for $100,000, to be paid in 5 monthly installments of $20,000. If A makes the first two payments, but fails to make the third payment, an acceleration clause would require that A must immediately pay B the entire balance of $60,000, or lose his right to purchase Blackacre (without getting a refund of his $40,000).

In a mortgage contract, activation of the acceleration clause may operate as a precursor to a foreclosure action. Under this proceeding, a bank may lawfully force sale of the property which the borrower acquired by using the mortgage loan. Proceeds from any subsequent sale of the property in question are kept by the lender (the bank) to recover for the amount the borrower still owes.

An example of an acceleration clause is examined in the 1971 Rhode Island Supreme Court case of Scullian v. Petrucci: There, the clause stated: "In the event Purchaser defaults on any payment or fails to comply with any condition of this contract [...] the full amount shall be immediately due and payable[...]". The court in that case found that the language of the clause required that default on the payment triggered the statute of limitations for the clause to be enforced.

Without the inclusion of an acceleration clause in a tenants standard lease, the right for the landlord to commence a lawsuit against the tenant for damages will amass upon the lease termination.

External links

• Promissory Note - Installment - With Acceleration Clause
• Acceleration Clause (Investorwords.com)