There are various types of lock in clauses. The premise behind all forms of lock in clauses is that it locks in one or more parties into a period in which they must perform or refrain from doing something. They apply in mortgages and contracts in general.
Lock-in Clause in Mortgages
A lock-in clause is a provision in a mortgage that “locks in” a borrower at a particular loan interest rate for a specified period of time.
Typically, lock-in clauses are for the initial seven years of a mortgage contract.
In a stable economic market with steady interest rates, a lender may give borrowers a lock-in clause for long periods of time. Conversely, a volatile economic market with rising interest rates may influence a lender to make lock-in periods shorter so that they can capitalize on charging borrowers higher rates when the rate increase occur.
Lock-in interest rates are typically low. A borrower may be incentivized to refinance his or her mortgage loan by making a “lump sum” prepayment during the lock-in period at the lower rate. This would be done to prevent the borrower from paying higher interests rates after the lock-in period finishes. However, lenders typically prevent this with the inclusion of a prepayment penalty provision in the mortgage contract.
Purpose and Effect of Lock-in Clause
A lock in clause is a provision in a contract that requires one of the party’s in a contract to commit to the terms of the contract for a specified period of time. Oftentimes, a lock-in clause prevents a borrower from refinancing for an extended duration to ensure the lender makes a minimum amount of money. The penalties for violating the terms of an agreement with a lock-in clause are typically harsh and thus prevent party’s bound to the lock in provision to violate the agreement.
In real estate, a lock-in clause may involve a landlord and tenant, whereby the tenant is required to commit to rental payments for the agreed upon term. Should the tenant decide to not abide by the terms of the rental agreement, the tenant may be forced to evict immediately, pay future rent, be subject to fees, and negative damage to their credit.
Components of a Lock-in Clause
Legal Remedy and Course of Action
Period for the lock-in period
Terms of clause
Party’s of a Lock-in Clause
There are two main parties in a lock-in clause- the licensee (party that has a duty to perform) and licensor (party that enforces lock-in clause). A significant percentage of lock-in clauses in real estate rentals requires the tenant to pay the full amount of rental payments, even if they opt to terminate early. Removal of the clause may require the party’s to settle or subject the terminating party to a penalty.
Implications of Breaking a Lock-in Clause
There are major legal implications for violating the terms of an agreement with a lock-in clause. The party enforcing the clause has multiple remedies to enforce the contract or have legal recourse to collect on the money they are due. The licensor (party enforcing contract) can place a judgment or negative rating on the licensee’s credit report, or take the tenant to court to collect on the money they are due. These are the most common legal remedies.
Courts often side with the damaged party because of the relative strength of the lock-in clause and the fact that the lock-in clause expressively states that damages result in fees and penalties to the violating party. The courts exact determination is based on the facts of the case. Damages awarded for cases involving lock-in clauses must be reasonable. Courts will not award punitive damages more than the amount charged.
How Court’s Interpret Lock-in Clauses
The purpose of awarding damages to the aggrieved party is to bring them to the position they were intended to be based on the specifics of the agreement. What this means is, the courts will determine what position the licensor was to be in had the damages not occurred. The law on this subject intends to put the aggrieved party in their original position irrespective of the damages and penalize the defendant either to pay fees or require them to perform their duties as expressed in the agreement. The law does not expressively require the party committing the damage to perform their tasks, however it does require the defendant to pay for damages in the event they elect to violate the terms of the agreement.
Furthermore, the law also puts the onus on the licensor to perform their duties as well. In the case of a landlord, the landlord cannot terminate the lease prior to its expiration. Courts will award tenants reasonable damages if the landlord puts the tenant in a compromised position, such as unlawfully renting the property to another party.
