Where the property acquired for public use is encumbered by a lien, the amount payable to the lienholder shall not include any penalty for prepayment.
§ 1265.240.Prepayment Penalty Not Included In Amount Payable to Lienholder
Title 7. Eminent Domain Law · Chapter 10. Divided Interests · Article 3. Encumbrances · Enacted 1975 · no amendments on record · Last verified July 29, 2026
In one sentenceSection 1265.240 provides that the amount payable to a lienholder out of a condemnation award may not include any penalty for prepaying the underlying debt.
Full Text of § 1265.240
Plain-English Summary
A mortgage or deed of trust often carries a prepayment penalty if the borrower pays it off early. This section makes clear that penalty does not travel into the eminent domain context: when property encumbered by a lien is condemned, the amount payable to the lienholder cannot include a charge for prepayment.
The condemnation forces the payoff -- the borrower did not choose to prepay -- so the lienholder recovers the debt itself, without collecting an extra fee premised on the borrower's voluntary early payment.
Frequently Asked Questions
Can a lienholder collect a prepayment penalty when condemnation forces payoff of the debt?
No, § 1265.240 excludes any prepayment penalty from the amount payable to the lienholder.
Why doesn't a prepayment penalty apply in this situation?
Because the debt is being paid off due to the taking, not because of a voluntary prepayment by the borrower.
Amendment History
Added by Stats. 1975, Ch. 1275.
Source & verification. Section text is reproduced verbatim from
the Deering's California Codes Annotated / vLex. Enacted by the California Legislature.
Last verified July 29, 2026.
· Official source
Also known as: prepayment penalty lien eminent domain californiamortgage payoff condemnation california