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An acceleration clause is a standard provision within commercial contracts, like loan agreements and mortgages. If you have not met your payment obligations, this clause allows your landlord or lender to demand payment for all outstanding rent or loan repayments. To help you better understand acceleration clauses, this article will:

  • define and provide an example where the clause would be effective;
  • outlines the benefits of the clause for landlords or lenders; and
  • flag potential issues with punitive acceleration clauses.

By understanding the acceleration clause within your contract, you can clarify your rights and obligations under the commercial agreement.

Acceleration Clauses

As a tenant, you agree to pay rent for the whole lease period when you enter a commercial lease agreement. Similarly, you agree to make full repayments when signing a mortgage agreement. In either instance, where you fail to make repayments, an acceleration clause can allow your landlord or mortgagee to demand you pay all outstanding payments.

Assume that you obtain a ten-year loan but fail to make a payment in the fifth year. Likewise, your loan agreement includes an acceleration clause which states that you, as the borrower, must repay the remaining balance if you miss one payment. In this case, the loan is accelerated, and the lender might contact you to pay the remaining balance in full. This could be considered a breach of contract if you cannot make the payment in full. 

Enforcing an Acceleration Clause

If you default a payment, enforcing an acceleration clause is often not as simple as a landlord or mortgagee immediately demanding repayments. For example, a mortgagee might allow you to correct your mistake and provide you with notice, depending on your default. If you remedy the default in accordance with the notice, there is no real need for the clause to come into effect. 

Understanding acceleration clauses within different commercial contracts can be quite complex. As such, it is important that you seek legal advice to clarify what your obligations are under your agreement.

​​Benefits of an Acceleration Clause

Acceleration clauses provide the most benefits to landlords and mortgagees. In a commercial agreement, an acceleration clause helps to avoid the risk of default payments. They do so by allowing a landlord or mortgagee to claim:

  • the immediate payment of rent; 
  • the remainder of the outstanding loan balance; or
  • interest payments in the context of a mortgage. 

As a tenant, you might not directly benefit from having to repay rent or a mortgage in full. However, there may be room for you to negotiate what triggers the repayment. Although a default in payment usually triggers an acceleration clause, this can vary amongst different commercial contracts. For example, a clause in one commercial lease agreement may require you to pay rent immediately after you miss one payment. However, in another agreement, the clause may allow you to miss three payments before the landlord can demand that you pay the rent. In this sense, you may benefit from an acceleration clause if you are able to receive some leniency around repayments by negotiating a longer default period. Negotiating the terms of an acceleration clause can be particularly beneficial as defaulting on rent is an unfortunate but possible occurrence in day-to-day business.

Punitive Clauses

It is important to be aware of the potential risks associated with acceleration clauses that are punitive in nature. Although, Australian contract law does not expect that a person in breach of a contract will pay an excessive amount.

Recently, courts have found that if the main purpose of a clause is created to punish a party for terminating a contract because of their breach, this would be considered penal. Additionally, acceleration clauses must not allow the landlord or lender to request the payment of a sum that is disproportionate to protect their legitimate interests.

Therefore, an acceleration clause may not be enforceable if it is punitive in nature or exceeds the legitimate interest of the landlord or lender, which the clause attempts to protect. If you believe that an acceleration clause is punitive or unfair in nature, you should seek legal advice.

Key Takeaways

An acceleration clause allows your landlord or lender to demand payment for all outstanding debts on rent or a loan. Although, this entitlement will only exist if you have not met the requirements for repayment. Acceleration clauses help to reduce the risk of default for the landlord or mortgagee. They do so by allowing the mortgagee to make the immediate payment of rent or the loan amount in full. 

If you have any questions about an acceleration clause in your commercial contract, our experienced commercial lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

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Frequently Asked Questions

What is an acceleration clause?

In a loan agreement, an acceleration clause allows the lender to demand the outstanding loan balance if the borrower has defaulted on their repayments.

What is a default interest clause in a loan agreement?

A default interest clause typically increases the interest rate that is payable on amounts that remain unpaid when they fall due.

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