Enforceability can depend on state law and the specific terms of the loan documents. For example, California case law (e.g., Tucker v. Lassen) suggests that a lender may only enforce such a clause when it is “reasonably necessary to protect its security,” not automatically in every case.

Tucker v Lassen was concluded in the California Supreme Court on October 10, 1974.

The Garn-St. Germain Depository Institutions Act of 1982, which became effective on October 15, 1982, provided exemptions under which the Lender cannot exercise the “due-on-transfer and due-on-encumbrance” provisions if the collateral Property is single-family or one-to-four units, including co-ops and residential dwellings, that are owner-occupied.

 https://en.wikipedia.org/wiki/Garn%E2%80%93St._Germain_Depository_Institutions_Act

Due-on-transfer and due-on-further encumbrance apply to all properties other than single-family and one-to-four residential.

The specific provision can be found in 12 U.S. Code 1701J-3. Therefore, if a due-on-transfer clause is mentioned in the first trust deed, the Lender may or may not be prohibited from exercising the due-on provisions, depending upon the type of collateral Property and the Exceptions.”

 Exceptions to the Due on Sale Clause and Due on Further Encumbrance:

 ·        Transfer to a spouse or children of the borrower.

•    Transfer to a relative resulting from the death of the borrower.

•    Transfer because of the death of a joint tenant or tenant by the entirety.

•    Transfer to a trust where the borrower is the beneficiary does not relate to the transfer of occupancy rights.

 https://www.law.cornell.edu/uscode/text/12/1701j-3

 https://www.roachlin.com/enforceability-or-lack-thereof-of-due-on-sale-and-due-on-encumbrance-clauses/

 https://www.fdic.gov/regulations/laws/rules/8000-8300.html

 https://www.alblawfirm.com/case-studies/due-on-sale-clause/

Given that PACE liens are senior and could jeopardize the Lender’s position, enforcement would likely be deemed reasonable. 

Tucker vs Lassen was effectively cancelled by Garn-St. Germain.

Here are the best practices for commercial lenders when dealing with PACE (Property Assessed Clean Energy) loans:

✅ 1. Require Prior Written Consent

• Most commercial loan agreements already include a due-on-encumbrance clause. Enforce this by requiring borrowers to obtain lender consent before recording any PACE lien.
• Make it explicit in loan documents that PACE financing without consent constitutes a default event.

·        DUE-ON-ENCUMBRANCE Clause

 “Borrower shall not, without Lender’s prior written consent, voluntarily or involuntarily create, incur, assume, or permit to exist any lien, Assessment, pledge, security interest, or other encumbrance (including, without limitation, any Property Assessed Clean Energy (PACE) or Property Assessed Value Enhancement (PAVE) assessment or similar financing) upon the Property or any part thereof, whether superior or subordinate to the lien of this Security Instrument, except for (i) the lien of current real property taxes and assessments not yet delinquent, and (ii) Permitted Encumbrances expressly approved by Lender in writing.

 Any violation of this covenant shall constitute an immediate Event of Default, and Lender may, at its option and without notice, declare the entire indebtedness secured hereby immediately due and payable. Lender’s consent to any encumbrance shall not be deemed a waiver of this provision as to any future encumbrance.

 For avoidance of doubt, any PACE or PAVE assessment or similar obligation that is collected with real property taxes and that creates a lien on the Property shall be deemed an “encumbrance” for purposes of this Section.”

✅ 2. Review Title and Closing Documents Carefully

• PACE liens have super-priority status, similar to property taxes, and can prime the Lender’s mortgage.
• Lenders should scrutinize title reports for any existing or pending PACE assessments before closing.

✅ 3. Underwrite the Impact of PACE Financing

• Evaluate whether the improvements funded by PACE truly enhance property value or cash flow.
• Consider the long-term nature of PACE obligations (15–30 years) and their effect on debt service coverage ratios.

✅ 4. Implement Escrow or Reserve Requirements

• If a PACE lien is allowed, require escrows or reserves for PACE assessment payments, like property tax escrows, to avoid delinquency and foreclosure risk.

✅ 5. Include Protective Covenants

• Add covenants prohibiting additional liens without consent and requiring prompt notice of any PACE-related assessments.
• Consider springing recourse provisions if unauthorized PACE financing occurs.

✅ 6. Education Borrowers

• Many borrowers view PACE as “just another financing tool” without realizing its impact on senior debt priority.
• Provide clear guidance on why lender consent is mandatory.

Here is a draft of a model “PACE Consent and Conditions” clause for commercial loan documents, or prepare a borrower disclosure form explaining the Absolutely—here’s a model “PACE Consent and Conditions” clause you can drop into a commercial loan agreement or into a deed of trust/mortgage rider. It is written to permit C‑PACE only if strict conditions are met and to preserve the senior Lender’s position to the greatest extent allowed by law.

Why these terms: PACE assessments are typically super‑priority liens (akin to property taxes) and can’t be contractually subordinated, so lenders protect themselves by requiring prior consent, escrows/reserves, notice and cure rights, and caps/underwriting conditions.

Model Clause: “PACE Consent and Conditions”

PACE CONSENT AND CONDITIONS.

 (a) No Additional Liens; PACE Prohibited Without Consent. Borrower shall not cause or permit the Property to be encumbered by any assessment, lien, or other encumbrance arising from any Property Assessed Clean Energy (PACE) or Commercial PACE (CPACE) financing (each, a “PACE Assessment”) without Lender’s prior written consent in Lender’s sole and absolute discretion. Any PACE Assessment recorded or imposed without such permission shall constitute an immediate Event of Default.

 (b) Conditional Consent. Suppose Lender elects, in its sole discretion, to consent to a PACE Assessment. In that case, such consent shall be conditioned upon satisfaction of all conditions precedent in this Section. It shall not constitute (i) a waiver of any provision of the Loan Documents, (ii) consent to any future PACE Assessment, or (iii) an agreement to subordinate the lien of the Security Instrument to any amount other than those amounts having priority as a matter of applicable law.

 (c) Conditions Precedent to Consent. As conditions to any consent, Borrower shall deliver to Lender, in form and substance satisfactory:

     (1) No Default/Bring‑Down. Evidence that (A) no Default or Event of Default has occurred and is continuing and (B) all representations and warranties remain accurate, correct, and complete in all material respects.

     (2) PACE Package. Complete copies of all proposed PACE documents, including program/assessment agreements, notices, schedules of assessments, amortization, and any related construction or disbursement agreements.

     (3) Scope and Cost. A detailed scope of eligible improvements, a third-party engineer’s report, and a final budget evidencing that the upgrades are energy/water/resiliency measures eligible under applicable PACE law and are reasonably likely to preserve or enhance the value and operating performance of the Property.

     (4) Amount/Term Cap. A cap on the PACE principal (including program fees and capitalized costs) not to exceed [__% of “as‑stabilized” value/$ / $__], with a term not to exceed [__] years, and assessment installments structured as level payments.

     (5) Non-Acceleration; Limited Enforcement. Written acknowledgement from the PACE capital provider and program administrator that, to the extent permitted by applicable law, (A) the PACE Assessment is not subject to acceleration except for delinquent installments then due, and (B) only delinquent installments (and statutory penalties/interest thereon) may be collected or enforced through foreclosure or tax sale, with all non‑delinquent future installments remaining unmatured.

     (6) No Interference with Remedies. A recognition agreement from the PACE capital provider/program administrator confirming that nothing in the PACE documents shall (A) restrict LLender’sexercise of remedies (including foreclosure, receivership and assignment of rents), (B) require LLenderto assume PACE obligations except for statutory obligations running with the land, or (C) impair Lender’s right to credit bid or take title, subject only to amounts that are senior by operation of law.

     (7) Notice and Cure Rights. An agreement that Lender (and any servicer) shall receive contemporaneous written notice of any PACE default and at least [30] days to cure the same, with the right (but not the obligation) to pay any delinquent installments, penalties, interest, or charges.

     (8) Reserves/Escrows. (A) Establishment of an escrow with Lender for PACE installments, funded monthly in an amount sufficient to pay each installment at least [30] days before the due date; and (B) if improvements are under construction, a capitalized interest and PACE‑installment reserve sized to carry installments through stabilization or [__] months after completion.

     (9) Financial Tests. Updated underwriting showing that, after giving pro forma effect to PACE installments and improvements, the Property satisfies a minimum debt service coverage ratio of [__]:1.00 (inclusive of PACE installments) and a minimum debt yield of [__]%.

     (10) Title/Endorsements. An updated title report evidencing the PACE Assessment and no other adverse liens, together with any endorsements Lender reasonably requires.

     (11) Insurance/Tax Coordination. Evidence that insurance and tax escrows (and coverage limits) remain adequate after completion of the PACE-funded improvements.

     (12) Opinions/Authority. Such borrower and, if applicable, non-consolidation and enforceability opinions, and evidence of organizational and governmental approvals, as Lender may reasonably require.

     (13) Fees and Costs. Payment of all reasonable out-of-pocket costs and expenses of Lender and its counsel related to the review and documentation of the PACE consent and related modifications.

 (d) Ongoing Covenants. Following any consent, Borrower shall (i) timely pay all PACE installments before delinquency (or fund required escrows), (ii) deliver evidence of payment upon request, (iii) not amend, increase, refinance, prepay with penalties, or terminate any PACE document without Lender’s prior written consent, and (iv) promptly provide Lender copies of all notices received from the PACE program.

 (e) Lender Protective Advances. Lender may, but is not obligated to, pay any delinquent PACE installments, penalties, interest, and charges. Any such amounts shall be Protective Advances, shall be added to the indebtedness, shall accrue interest at the Default Rate, and shall be secured by the Security Instrument with the same priority.

 (f) Event of Default. Any breach of this Section, any unauthorized PACE Assessment, any uncured delinquency in PACE installments, or any PACE foreclosure/tax sale proceeding commenced against the Property shall constitute an immediate Event of Default under the Loan Documents.

 (g) No Waiver; No Subordination. Lender’s consent to a specific PACE Assessment is limited to the PACE documents approved by Lender. It is not a waiver of any right, including Lender’s right to declare a default under any due‑on‑encumbrance provision. Nothing herein shall be construed as an agreement by Lender to subordinate its lien to any amount except to the extent that any PACE Assessment has priority as a matter of applicable law.

 (h) Definitions. “PACE” or “C‑PACE” means any program established under applicable state or local law providing for financing of qualifying improvements to be repaid as a voluntary assessment or charge collected with real property taxes, together with any related fees, interest, penalties, and costs.

 (i) Survival. The provisions of this Section survive any foreclosure or deed‑in‑lieu to the maximum extent permitted by applicable law.

 Short‑Form Consent Letter (to program administrator/capital provider)

[Date]

 Re: Senior Mortgagee Consent to PACE Assessment – [Property Address], APN [__]

 Reference is made to that particular mortgage/deed of trust (the “Mortgage”) dated [__], executed by [Borrower] in favor of [Lender] and recorded [__] as Instrument No. [__] in the Official Records of [County, State] (the “Records”), encumbering the real Property commonly known as [__] (the “Property”).

Subject to the conditions below, Lender consents to the imposition of a PACE assessment (the “Assessment”) on the Property in the original principal amount not to exceed $[__], for a term not to exceed [__] years, with semi-annual installments as set forth on Exhibit A.

 This consent is conditioned upon and incorporates the following acknowledgments by the Program Administrator and the PACE capital provider:

 1. Non‑Acceleration. Except for delinquent installments then due, the Assessment not be accelerated.

2. Limited Enforcement. Only delinquent installments (with statutory penalties/interest) may be enforced by foreclosure/tax sale; non-delinquent future installments remain unmatured.

3. Notice/Cure. Lender (and its servicer) shall receive written notice of any default at least [30] days before enforcement and may cure by paying sums then due.

4. No Interference. Nothing herein limits Lender’s remedies under the Mortgage. Any foreclosure or deed‑in‑lieu by Lender shall take title subject only to amounts senior by operation of law.

5. No Amendments. The Assessment terms shall not be amended, increased, or prepaid with penalty without Lender’s prior written consent.

6. Reliance. The Program Administrator acknowledges the Lender’s reliance on these conditions in issuing this consent.

All other terms of the Mortgage remain in full force and effect. This consent is limited to the Assessed and is not a waiver of the Mortgage’s due‑on‑encumbrance or other provisions.

[Lender signature block]

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Notes for Counsel (optional)

• Super‑priority reality: C‑PACE assessments typically enjoy statutory priority comparable to property taxes and will prime the mortgage for delinquent installments; most programs also do not permit acceleration of the entire stream—only delinquent installments can be enforced. Your consent package should secure written acknowledgments consistent with the applicable statute and program rules.
• Escrows/reserves: Treat PACE like taxes—require installment escrows and, during construction, a capitalized reserve to carry installments until stabilization.
• Underwriting: Underwrite with PACE installments as a fixed charge; set DSCR and debt yield floors post‑PACE. Some lenders keep PACE ≤ a percentage of value/cost.
• Documentation set: Besides the clause, use a recognition/consent agreement with the program and capital provider, and update your title pro forma to reflect any required endorsements.

• Be sure to consult a lawyer to draft your documents and consider material facts. I believe we can anticipate significant litigation in the future regarding the priority of secured trust deeds, mortgages, and PACE encumbrances, which have priority over secured liens at the same level as property taxes. Will private property rights, established by history, or will Wall Street securitization mechanisms prevail?