Often times, deeds of trust or other security interests arising from contract, statute, common law, or equity, include a penalty for paying off the lien before it is due. 

There are a number rules that apply to whether and how much of a lien can be paid off before it is due without a penalty.  Among these are California Bus. & Prof. Code § 10242.6 and Civil Code §§ 2954.9, 2954.10.  Importantly however, California’s Eminent Domain Law has a rule that eclipses all of these provisions. 

Section 1265.240 of the Code of Civil Procedure specifies that, “[w]here the property acquired for public use is encumbered by a lien, the amount payable to the lienholder shall not include any penalty for prepayment.”  Importantly, Section 1265.240 does not distinguish whether the property was condemned in litigation or otherwise.   

The issue of prepayment penalties often arises where the property is being transactionally acquired through a negotiated purchase.  To avoid claims by the lender for prepayment penalties, make sure the purchase and sale agreement recites that the property is being acquired for public use in lieu of condemnation, and to advise the lender of the Eminent Domain Law’s absolute rule barring prepayment penalties in such circumstances.