A federal appeals court in Richmond yesterday upheld a practice lending institutions use to guard against inflation, which requires persons who sell real estate to pay off their mortgages immediately.

Under Virginia law, mortgage lending institutions may use a "due-on-sale" clause, stating that when mortgaged property is sold the outstanding principal of the loan is due, thus forcing the new buyer to get a mortgage from a lender at a higher interest rate rather than assuming the lower rate from the seller. Without this clause a lender would lose the opportunity to lend new money at the current higher rates.

The court case, first filed in U.S. District Court in Alexandria, centers on the "due-on-sale" clause and whether land trust sales violate those clauses. In a land trust sale the owner names himself trustee, retains title to the property and sells a beneficial interest in it. Thus, the owner is selling personal -- not real -- property, critics of the clause have said. The buyer makes payments on the real estate without the need to get approval from the lending institution.

Courts have upheld the right of buyers to assume mortgages written by state-chartered savings and loans but, on the other hand, have upheld the right of federally chartered savings and loans to enforce the "due-on-sale" clause.

The Fourth U.S. Circuit Court of Appeals, in upholding the lower court decision, said, "There is nothing unfair or unreasonable" in the due-on-sale clause. If the leading institutions "have complied with all requirements of the law, they are entitled to enforce their due-on-sale clauses," the three-judge appeals panel said.

The case began when Susan and Jeffrey Williams wanted to buy a house in Fairfax two years ago but faced 13 percent interest rates on mortgage loans. The 8 3/4 percent mortgage on the house was not assumble, the sales agent told them. So the Williamses, through their attorney Paul D. Scanlon, used the land trust sale, which meant the owner of the house retained title to the property while the Williamses paid off the mortgage at the lower rate.

The lender, First Federal Savings and Loan Association of Arlington, objected to the arrangement and told Bailey it would take action to foreclose if the outstanding balance of the loan was not settled.

The Williamses later sued First Federal to force it to recognize the validity of the land trust. Three other cases were consolidated for the appeal.

Scanlon said he will appeal the decision to the U.S. Supreme Court "as sure as the sun rises in the morning." The final decision in the case will determine what rights a private citizen has in disposing of his property, Scanlon said.

"There are lots of constitutional issues," Scalon said, such as freedom and "what a citizen of the United States of America can do with his own property."

If the Williamses and the other couples are successful, they may open up another creative-financing loophole for getting cheaper mortgage rates. As for now, "They're happily enjoying their home," Scanlon said.