Acceleration Clause

An Acceleration Clause is a contractual provision that allows a lender or creditor to demand full and immediate repayment of the remaining balance on a loan or debt obligation upon the occurrence of specified events or conditions.

Key elements of a well-drafted Acceleration Clause include:

  1. Triggering Events: Clearly defining the specific events or circumstances that would trigger the acceleration of the debt, such as default on payments, breach of covenants, insolvency, or change in ownership.
  2. Notice Requirements: Establishing procedures for providing written notice of the acceleration to the borrower or debtor, including any cure periods or opportunities to remedy the triggering event before acceleration.
  3. Due Date and Payment Terms: Specifying the due date for the full outstanding balance upon acceleration, as well as any applicable interest, fees, or penalties.
  4. Remedies and Enforcement: Outlining the lender's or creditor's rights and remedies in the event of non-payment after acceleration, such as foreclosure, collateral seizure, or legal action.
  5. Waiver and Reinstatement: Considering provisions for waiving or reinstating the acceleration under certain conditions, such as curing the default or reaching a settlement agreement.

Acceleration Clauses are essential in various types of financing and credit agreements, particularly those involving secured loans, mortgages, or long-term debt obligations. Examples:

  • Loan Agreement: "Upon the occurrence of an Event of Default, as defined in Section X, and after providing written notice to the Borrower, the Lender may, at its sole discretion, declare the entire outstanding principal balance, together with accrued interest and all other amounts payable under this Agreement, to be immediately due and payable."
  • Bond Indenture: "If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then-outstanding Bonds may declare the principal of and accrued interest on all the Bonds to be due and payable immediately."
  • Mortgage Agreement: "Upon the Borrower's failure to make any payment required under this Mortgage or upon the occurrence of any other Event of Default, the Lender may, at its option, declare the entire unpaid principal balance, together with all accrued interest and other charges, immediately due and payable."

When reviewing an Acceleration Clause, a contract drafter should be aware of:

  • Clear Triggering Events: Ensuring that the triggering events for acceleration are clearly and objectively defined, avoiding ambiguity or subjective interpretations.
  • Notice and Cure Periods: Evaluating the adequacy of notice requirements and cure periods, if any, to allow the borrower or debtor an opportunity to remedy the breach before acceleration.
  • Remedies and Enforcement: Carefully considering the lender's or creditor's remedies and enforcement mechanisms upon acceleration, ensuring they are legally enforceable and consistent with applicable laws and regulations.
  • Interaction with Other Clauses: Analyzing how the Acceleration Clause interacts with other provisions, such as default clauses, security interests, and limitation of liability clauses, to ensure consistency and avoid conflicts.
  • Consequences and Impact: Assessing the potential consequences and impact of acceleration on the borrower or debtor, including the ability to repay the outstanding balance and the potential for cross-defaults or cascading effects on other agreements.

Other closely related clauses that contract drafters should consider in conjunction with the Acceleration Clause include:

  • Default Clause: Defining the specific events or circumstances that constitute a default under the agreement, which may trigger the Acceleration Clause.
  • Security Interests and Collateral: Provisions relating to the lender's or creditor's security interests, collateral, or other forms of credit enhancements, which may be enforced upon acceleration.
  • Cross-Default Provisions: Clauses that link the acceleration of one debt obligation to defaults or accelerations under other agreements, potentially leading to a cascading effect.
  • Limitation of Liability: Clauses that limit or cap the lender's or creditor's liability in the event of acceleration or enforcement actions, ensuring consistency and appropriate risk allocation.

By carefully drafting and reviewing Acceleration Clauses, in conjunction with related provisions, corporate lawyers can protect their clients' interests, manage credit risks, and ensure a clear understanding of the rights, obligations, and consequences associated with the acceleration of debt or loan obligations.

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