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Commercial Agreements – A Market-Prompted Review of Provisions

Against the background of the ever-shifting commercial real estate market, it is especially important to periodically review the specific provisions contained in agreements of purchase and sale for commercial properties, from the points of view of the mortgage lender, the seller, and the buyer.

For the mortgage lender:

In situations where the buyer is expected to assume an existing mortgage, in the current climate it is no longer a foregone conclusion that the mortgage lender will consent to the sale. Rather, the lender may want to make its consent subject to additional conditions, such as a guarantee from the buyers. The lender may also want to insist on a large assumption fee and the payment of costs. (On the other hand, in today’s market these fees and costs – which were historically borne by the buyer – are often the subject of negotiation, and the vendor and/or the lender may want to agree to split the fees or absorb the costs).

Secondly, lenders are usually not willing to renegotiate the terms of an assumed mortgage with the buyer. In fact, mortgage lenders are increasingly seizing on the opportunity of the assignment to insist on the addition of enhanced security, such as the addition of environmental covenants/indemnities, or the requirement for non-disturbance and attornment agreements from later-ranking tenants.

For the buyer:

The buyer will want a condition that the terms and conditions of the about-to-be-assumed mortgage are satisfactory to it, and that the buyer has approved the form and content of any assumption agreement and other closing documents required by the lender. This may take longer than the usual due diligence period given to the buyer because satisfaction of this condition may be delayed if the lender does not provide the assumption agreement for approval expeditiously.

Also, the preparation of the mortgage assumption document can be expensive for the buyer, and can involve delay. This is because – in addition to requiring a guarantee or new general security agreement or an assignment of new leases – the lender may also want an opinion on title and updated off-title searches, and/or copies of the buyer’s environmental and other due diligence reports. All of this takes time to gather, and the relevant dates for the transaction should be adjusted accordingly.

For the seller:

The agreement of purchase and sale should also contain a condition that the mortgage lender’s consent – both to the sale of the property and the assumption of the mortgage by the buyer – has been obtained. (This protects the seller’s right to terminate the agreement in the event the lender’s consent is not forthcoming.) In the past, the timing for this condition has usually been tied to the buyer’s due diligence period. In the current market, however, a longer period may be needed to accommodate mortgage lenders’ more stringent requirements.

Finally, in today’s market the seller may not be able to negotiate a release of its own liability to the mortgage lender, despite the assumption of the mortgage by the buyer. If this is the case, and given that the seller remains responsible for payment of the mortgage debt until it has been discharged, the seller should obtain an indemnity from the buyer. Naturally, the seller will want to confirm that the buyer can make good on the indemnity and/or provide adequate security. In order to secure the purchaser’s indemnity, the seller may want to take a second mortgage on the property, or an alternate form of security.