Exculpatory Clause

An exculpatory clause contained in a loan contract is a provision that relieves the borrower from any personal liability.

This means that should a borrower default on a mortgage, the most that the lender can do is foreclose the property to recover the debt.

Should the sales proceeds be insufficient to fully settle the outstanding debt, there is no other legal avenue for the lender to pursue the borrower for the shortage.

There would be no legal basis to file a suit or obtain a deficiency judgment from the courts.

For this reason, homeowners are usually receptive to exculpatory clauses while lenders naturally want to avoid them as much as possible.

Because of this, mortgage contracts usually do not contain exculpatory clauses unless expressly requested by the mortgagor.

Even so, lenders would surely want to get something back in exchange for inserting such clauses which limits their legal actions.

If they are willing to entertain such requests, they might ask for higher interest rates, more points, or higher prepayment penalties, etc.

In the investment world, real estate investors often make use of exculpatory clauses for tax planning purposes.

This have to do with personal liabilities of partners which affects tax claims for depreciation.