What is an Acceleration Clause in Canada?

A comprehensive look at what an acceleration clause is, triggers for activation, and related terms.

An acceleration clause in real estate, particularly in the context of Canadian mortgage agreements, is a contractual provision allowing a lender to demand full repayment of an outstanding loan if certain conditions are unmet. This clause, also known as an “acceleration covenant,” is designed to protect lenders by mitigating risks associated with borrower default.

Definition and Function

The acceleration clause permits the lender to expedite the payment schedule, requiring the borrower to pay the entire loan balance if specific triggers occur, such as default on payments, sale of the property, or refinancing. While not commonly employed by Canadian lenders, when present, it serves as a critical tool for managing the risk of default and ensuring the efficient recovery of the loan amount.

Triggers for Activation

Payment Delinquency
The most frequent trigger for an acceleration clause is the failure to make timely payments. The number of missed payments required to invoke the clause varies by agreement; some demand full repayment after a single missed payment, while others allow multiple missed payments before enforcement.

Transfer or Sale of Property
Selling or transferring the property without the lender’s consent can also trigger the clause. This ensures the lender maintains control over the loan terms and its associated collateral.

Refinancing
If a borrower refinances the loan, the acceleration clause may activate, requiring the borrower to settle the existing loan balance before proceeding with new financing arrangements.

Legal Implications

The legal framework surrounding acceleration clauses in Canada underscores their independence from other mortgage terms. Courts have determined that these clauses are separate from other contractual obligations, granting lenders the discretion to enforce them. A lender is not obligated to invoke the clause but can choose to do so if it serves their interests.

Impact on Borrowers

Invoking an acceleration clause imposes immediate financial demands on borrowers. If unable to meet the accelerated payment demand, borrowers may face foreclosure, where the lender seizes and sells the property to recover the loan amount. This process can be especially burdensome for borrowers already experiencing financial difficulties.

Equity of Redemption

In Canadian real estate law, equity of redemption allows borrowers to reclaim their property by paying off the full loan balance, including accrued interest and costs, before foreclosure is finalized. However, if the lender has not initiated foreclosure or issued a Notice of Power of Sale and is seeking only arrears, the equity of redemption may not be triggered.

Commercial Purpose

The commercial purpose of acceleration clauses is to provide certainty and security for lenders. By ensuring loans can be promptly recovered in the event of default, lenders can maintain expected yields on their investments. This predictability is vital for the mortgage market, where loans are often bought and sold based on anticipated returns.

Related Terms

Assumption Clause
An assumption clause allows a buyer to assume responsibility for the seller’s loan, potentially bypassing the need for an acceleration clause if the lender consents.

Alienation Clause
An alienation clause requires full payment of the mortgage upon transferring property ownership, similar to an acceleration clause in property sales.

Call Option
A call option provides the lender the right to demand the loan balance at any time, offering even greater flexibility than an acceleration clause.

Conversion Clause
A conversion clause pertains to adjustable-rate loans, allowing conversion to a fixed-rate loan, which may involve different terms regarding acceleration.

Practical Considerations

From a practical standpoint, lenders must clearly communicate the conditions under which an acceleration clause will be enforced. Borrowers should be aware of these conditions and the potential consequences of triggering the clause. Lenders often include detailed provisions in the loan agreement to ensure borrowers understand their obligations and the lender’s rights.