Legal Definitions - acceleration clause

An acceleration clause is a specific provision found within a loan or credit agreement. It grants the lender the right to demand immediate repayment of the entire outstanding balance of the loan, including any accrued interest, before its original maturity date. This right is typically triggered if the borrower fails to meet certain conditions or breaches specific terms outlined in the agreement. Its primary purpose is to protect the lender by allowing them to recover their funds quickly if the borrower's financial reliability or adherence to the agreement becomes compromised.

Here are some examples of how an acceleration clause might apply:

• Car Loan with Insurance Requirement: Imagine Sarah takes out a loan to purchase a new car. The loan agreement includes an acceleration clause stating that she must maintain comprehensive auto insurance on the vehicle for the entire duration of the loan. If Sarah forgets to renew her policy, and her insurance lapses for a month, the lender might discover this breach. The lender could then invoke the acceleration clause, demanding that Sarah immediately pay the remaining balance of her car loan, rather than continuing with her scheduled monthly payments. This illustrates an acceleration clause because a specific breach (lapsed insurance) allowed the lender to demand the full loan amount much sooner than originally scheduled.

• Business Loan with Collateral Maintenance: A small manufacturing company secures a business loan, using its specialized machinery as collateral. The loan agreement contains an acceleration clause requiring the company to maintain the machinery's value above a certain threshold and to keep it in good working order. If, due to unexpected market changes or neglect, the value of the machinery significantly depreciates below the agreed-upon threshold, the bank (as the lender) might become concerned about the reduced security for the loan. The bank could then invoke the acceleration clause, requiring the manufacturing company to repay the entire outstanding loan balance immediately. This example demonstrates how an acceleration clause can be triggered by a decline in the value of collateral, giving the lender the ability to call the loan due early to protect its investment.

• Commercial Lease with Use Restrictions: Consider a tenant who signs a commercial lease for a retail space, and the lease agreement includes an acceleration clause. The lease specifies that the premises must only be used for selling clothing and accessories. If the tenant decides to expand their business and begins selling prepared food items from the same location, this would be a clear violation of the lease's "permitted use" clause. Upon discovering this breach, the landlord could invoke the acceleration clause in the lease, demanding that the tenant immediately pay all remaining rent payments for the entire term of the lease, rather than continuing with monthly installments. Here, the acceleration clause is applied in a lease context, allowing the landlord to demand all future rent payments at once due to the tenant's breach of the agreed-upon use of the property.