Opinion ID: 1142570
Heading Depth: 1
Heading Rank: 3

Heading: optional vs. obligatory advances

Text: In situations different from the one we face today, but where a prior deed of trust which still secures an unpaid debt remains uncancelled, the distinction between optional and obligatory advance clauses can determine the outcome, insofar as the interests of lienholders who may have acquired an interest in the land are concerned. An obligatory advance is one which the lender (beneficiary) is bound by contract to make at a later date. However, an optional advance clause is a horse of a different color; the lender (beneficiary) has the discretion to determine at a later date if he wishes to lend more money to the borrower (grantor), and is not bound by contract to make any additional loans. One leading authority has described the difference between optional and obligatory advances as follows: So far as enforcement between the parties is concerned, the obligatory-optional distinction is irrelevant. Even if the advance is clearly optional, its acceptance by the mortgagor signifies his willingness to have it included in the mortgage. However, when a subsequent third-party creditor enters the picture, it becomes critically important to determine whether the advance is obligatory or not. The rule widely followed in the United States is this: if the advance is obligatory, it takes its priority from the date of the original mortgage, and the subsequent creditor is junior to it ... However, if the advance is optional, and if the mortgagee has notice when the advance is made that a subsequent mortgagee or lienor has acquired an interest in the land, then the advance loses its priority to that creditor. S. Nelson & D. Whitman, Real Estate Finance Law 885-86 (2nd Ed. 1985) (footnotes omitted). There are good reasons for making this distinction between obligatory and optional advances, as explained by this same authority: Dragnet clauses are frequently included in the printed language of mortgages drafted by mortgagees. They are seldom the subject of negotiation, and may go entirely unnoticed by the mortgagor until the mortgagee asserts them. The rule making optional advances subordinate to intervening liens is highly relevant in this context. Advances secured by dragnet clauses are almost never obligatory; the only factual issue is generally whether the mortgagee had the requisite notice of intervening liens, and this is usually not hard to determine. Moreover the rule . .. makes rather good sense in the dragnet clause case; in its absence, a mortgagor might naively execute upon his house a mortgage containing a dragnet clause and subsequently find himself locked to that particular lender for the rest of his life. Id. at 899 (citations omitted). Regarding the distinction between optional and obligatory future advance clauses, other authorities are in agreement, notwithstanding the comment of Professor Gilmore [1] to the contrary. If the limit (in a dragnet clause regarding future advances) be not defined in any way, it can be good only for the advances made at the time, and such others as may afterward be made before any other incumbrances are made upon the property mortgaged. A mortgage which merely declares that it is to secure such advances as shall thereafter be made by the mortgagee to the mortgagor, or such indebtedness as shall thereafter arise between them, should, it would seem, be held invalid either as against the policy of the law or as constituting evidence of fraud. 1 Jones on Mortgages § 458 (1928) (footnotes omitted).