Legal Definitions - alienation clause

An alienation clause is a provision found within a legal document, most commonly a deed or an insurance policy, that addresses the transfer of ownership of property. Its primary function is to either restrict, permit, or specify the consequences of transferring a property to a new owner.

• In real estate deeds and mortgages: An alienation clause can control whether and how a property owner can sell, gift, or otherwise transfer their property to someone else. A common type in mortgages is a "due-on-sale" clause, which allows the lender to demand full repayment of the loan if the property is sold.
• In insurance policies: An alienation clause can state that insurance coverage becomes void or terminates if the insured property is sold or transferred to a new owner, as the original policyholder no longer has an insurable interest.

Here are some examples illustrating how an alienation clause works:

• Example 1 (Real Estate - Restrictive Deed Clause):

  A wealthy philanthropist donates a large tract of land to a city for the creation of a public park. The deed transferring the land includes an alienation clause specifying that the city can never sell, lease, or develop the land for commercial purposes. If the city attempts to do so, ownership of the land would automatically revert to the philanthropist's estate or a designated charity. This clause ensures the land remains a public park as intended by restricting its future transfer or use.

  Explanation: This example demonstrates an alienation clause in a deed that imposes a significant restriction on the future transfer (alienation) of the property, ensuring it serves a specific, non-commercial purpose indefinitely.

• Example 2 (Real Estate - Mortgage Due-on-Sale Clause):

  Sarah has a mortgage on her home. Her mortgage agreement contains a standard alienation clause, often called a "due-on-sale" clause. When Sarah decides to sell her home to a new buyer, the mortgage lender invokes this clause, requiring Sarah to pay off the entire remaining balance of her mortgage loan at the time of the sale. The new buyer then obtains their own financing.

  Explanation: Here, the alienation clause doesn't prohibit the sale of the property but dictates a specific financial consequence—the immediate repayment of the loan—upon the transfer of ownership. This protects the lender's interest by preventing the loan from being assumed by a potentially less creditworthy buyer at the original interest rate.

• Example 3 (Insurance Policy Clause):

  A small manufacturing company has a comprehensive property insurance policy covering its factory building and equipment. The policy includes an alienation clause. The company decides to sell the entire business, including the factory building, to a larger corporation. After the sale is finalized and ownership of the building officially transfers to the new corporation, a significant fire breaks out. The original manufacturing company attempts to file a claim under its old policy.

  Explanation: The alienation clause in the original policy would likely void coverage for the fire. Once the property was sold and ownership transferred, the original policyholder no longer had an insurable interest in the factory. The new owner would need their own insurance policy to cover the property. This clause prevents an insurer from being liable for property no longer owned by their policyholder.