Lesson 7 of 25 · 6 min
What payable on demand does to a cure window
The gap was twenty-one thousand and the amount that can be required is the whole balance.
A demand feature and a cure window answer different questions, and a borrower who has read only the window has read the smaller of the two clauses. The window governs a remedy for a shortfall. The demand feature governs the loan.
Payable on demand means the lender may require repayment of the outstanding balance at a time of its choosing, without a breach, without a threshold being crossed, and without a reason being stated. The maintenance test is one thing that might prompt a demand. It is not a precondition for one.
The size difference is the point. Take a collateral value of $826,000, a threshold of 73 percent and a balance of $624,000. The permitted balance is $826,000 × 0.73 = $602,980, so the shortfall is $21,020. Curing that shortfall by sale requires $21,020 ÷ 0.27 = $77,851.85. Under a demand, the figure is $624,000 — 29.7 times the shortfall, because $624,000 ÷ $21,020 = 29.69.
Two consequences follow from the coexistence of the clauses. A stated cure window sits inside a facility that can be terminated in full, so the window describes the remedy the lender has chosen to describe, not the limit of what it may require. And a demand is not a breach: there is no ratio to restore, no threshold to return under, and no partial satisfaction that ends it. The obligation is the balance.
A cure window bounds the size of the remedy at the shortfall. A demand clause removes that bound and puts the whole balance in its place.
Key terms
- Payable on demand
- A term letting the lender require the full balance at any time, with no breach required and no reason given.
- Facility termination
- Withdrawing the line itself, so undrawn capacity disappears and the drawn balance becomes repayable.
- Remedy
- What the lender may require when something goes wrong. A shortfall remedy is sized by the gap; a demand is sized by the loan.
Worked example
The shortfall and the demand, side by side
Collateral value $826,000, threshold 73 percent, balance $624,000.
- Permitted balance
- $602,980
- Shortfall
- $21,020
- Cure by sale, at 73 percent
- $77,851.85
- Amount a demand can require
- $624,000
- Ratio of the two
- 29.7×
$826,000 × 0.73.
$21,020 ÷ 0.27.
$624,000 ÷ $21,020.
Both clauses were in the same document. One produced a $77,851.85 sale and the other a $624,000 obligation.
Check yourself
Your agreement grants three business days to cure a shortfall and also states that the balance is payable on demand. A shortfall of $21,020 arises. What is the largest amount the lender may require?
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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.