Legal Definitions - recognition clause

A recognition clause is a specific provision, typically found in real estate financing agreements, designed to protect individual property buyers when a larger piece of land, financed by a single loan, is subdivided and sold off in smaller parcels.

Its primary purpose is to ensure that if the original developer or landowner defaults on their overarching loan for the entire property, the individual buyers who have already purchased their specific lots or units will not lose their property due to that default. This protection applies as long as the individual buyers are fulfilling their own purchase obligations, such as making their mortgage payments or installment payments under a contract for deed.

Here are a few examples illustrating how a recognition clause works:

• New Residential Subdivision: Imagine a developer, "Harmony Homes LLC," purchases a large tract of undeveloped land to create a new residential neighborhood called "Oakwood Gardens." Harmony Homes LLC secures a substantial "blanket mortgage" from "Capital Bank" to finance the acquisition of the land and the initial infrastructure development (like roads and utilities) for the entire subdivision. This blanket mortgage agreement includes a recognition clause.

  Mr. and Mrs. Thompson later purchase an individual lot in Oakwood Gardens from Harmony Homes LLC and obtain their own mortgage to build their dream home. If Harmony Homes LLC subsequently faces financial difficulties and defaults on its large blanket mortgage with Capital Bank, the recognition clause prevents Capital Bank from foreclosing on Mr. and Mrs. Thompson's specific lot. As long as the Thompsons are current on their own mortgage payments, their ownership of their property is recognized and protected, even if the developer's larger loan fails.

• Phased Condominium Project: Consider "Skyline Developers," a company constructing a multi-building condominium complex in several phases. They obtain a significant construction loan from "Metro Bank" to cover the entire project. The loan agreement between Skyline Developers and Metro Bank contains a recognition clause.

  Ms. Chen buys a unit in the first completed building of the complex and moves in, securing her own individual mortgage for her condominium. If Skyline Developers later struggles to sell units in the subsequent phases and defaults on its large construction loan with Metro Bank, the recognition clause safeguards Ms. Chen. Metro Bank cannot seize her condominium unit because she has fulfilled her purchase obligations and is current on her own mortgage, despite the developer's failure on the larger project financing.

• Rural Land Divided for Smallholdings: A private landowner, Mr. Davies, owns a large rural property with an existing mortgage from "Countryside Credit Union." He decides to subdivide a portion of his land into several smaller plots suitable for individual smallholdings or hobby farms. He then enters into a contract for deed with Ms. Patel for one of these specific plots. The contract for deed explicitly includes a recognition clause, and Countryside Credit Union has acknowledged and agreed to this arrangement.

  Ms. Patel begins making her regular installment payments to Mr. Davies as stipulated in the contract for deed. If, at some point, Mr. Davies defaults on his original, larger mortgage with Countryside Credit Union due to unrelated financial issues, the recognition clause protects Ms. Patel. Countryside Credit Union cannot foreclose on her specific smallholding, provided she continues to make her payments as agreed in her contract for deed. Her interest in the property is recognized and secured, independent of Mr. Davies's default on his overall loan.