searche Mortgage o Remortgage tsearchr Mortagagemortgagelender ub Lender csearcho Remortgage osearchtyusearche Ireland a Mortgage searchesearchdsearchryubecaoe Ireland reasearchdsearcht Lender o Lender t Remortgage g Mortgage g Ireland m Lender rga Mortgage eensearche gLsearchn Mortgage e Lender Mortgage orsearchg Remortgage g Mortagagemortgagelender Remortgage Mortgage emr Ireland gae Mortgage esearcherc Remortgage o Remortgage M Lender r Mortagagemortgagelender gasearche Mortgage tsea Lender chasearchMsearchr Mortgage gasearche searchm Lender rladsearche Lender esearchrc Mortgage t Lender r Mortgage ln Mortgage search: Perhaps the strangest statement by the court is the following, which appears on page 108 of the opinion:

"MetLife knew or had reason to know that Mart Owners attached that meaning [suggested by Mart Owners] to the provision, and Mart Owners did not know or have reason to know that MetLife attached a different meaning to the provision. Accordingly ... the provision has the meaning attached by Mart Owners."

Huh?? Now the court apparently is telling MetLife what they REALLY were thinking instead of what they thought they were thinking. This is Alice in Wonderland stuff.

Reporter's Comment 6: It is clear from the testimony and court documents, and the language in the body of the opinion, that Mart Owners clearly always expected to pay a prepayment premium of some undetermined amount. Mart Owners had even hired a consultant who would be entitled to two percent of any reduction he could achieve in the amount of the prepayment premium to be paid by Mart Owners. When MetLife first advised this consultant, in April 1997, that it had preliminarily selected A to BBB bonds as the comparable investment, the consultant did not object or complain and, as the court noted in its opinion, "At no time prior to January 1998 did Mart Owners or its representatives object to the fee as described by MetLife or claim that no fee was due, or demand an explanation as to how the comparable instrument was selected." In connection with the sale of the Mart in 1998 to Vornado, Vornado had agreed to pay 50% of any prepayment fee incurred by Mart Owners up to $10 million. In addition, Mart Owners could direct the payment of their share of the prepayment fee out of the $181 million cash component of the sale transaction.

Editor's Comment 1: The editor is limited to commenting only upon Jack's report of this unpublished decision, but nevertheless a few comments appear to be in order. First, although Jack correctly notes that the prepayment provision is somewhat unusual in today's market, the concept of a "defeasance" clause, which is effectively what MetLife did here, as an alternative to a prepayment right has been a staple of the government bond marketplace for at least a half century. The editor has already heard some talk in securitization circles of using defeasance as the industry standard for dealing with prepayment issues, so the opinion has greater significance than might first appear.

Editor's Comment 2: The editor is far less troubled than Jack with the notion that, where an ambiguity exists, and party A knows that the party B is relying on a given construction, but the party B does not know that there is a possible alternative construction, then party A, the party with the knowledge and the ability to avoid unjust reliance, has a duty to clarify the ambiguity, and is punished for its failure to do so by living with the construction upon which party B relied. Honoring good faith reliance and punishing inequitable delay in asserting one's position are common equitable concepts, and not so far fetched.

Editor's Comment 3: Although we may not agree with the ultimate outcome, the editor must confess that a determination of "equivalent value," without clear standards being established, necessarily must be subject to judicial scrutiny for reasonableness and fairness. Otherwise, the lender could do anything it wanted. Lenders may prefer the latter result, but it ain't gonna happen.

Editor's Comment 4: On the other hand, the editor is foursquare in Jack's camp on Jack's main point, that commercial law ought not to rely upon concepts of "good faith" as the measure of commercial responsibilities, because reliance upon this concept invites the courts to second guess the business judgments of the parties, and most courts demonstrably are incapable of doing that in a way that even objective observers within the business community find acceptable.

The editor notes that reliance upon good faith judgment and equitable principles of contract relationships is quite common in Civil Law countries. The editor lacks exhaustive knowledge of judicial selection and training in such countries, but the fact that judging in such countries is a career, rather than a reward for successful trial practitioners (largely tort and criminal specialists), suggests that judges in such countries who deal with business disputes perhaps have a bit more of an orientation toward the thinking of parties involved in business transactions than the typical trial judge in an American court.

Therefore, unlike the Civil Law system, it would appear to be wise for American transactions lawyers to supply in the contracts their own benchmarks of reasonable behavior wherever possible.

Here are some general comments on the yield maintenance provision by Stevens Cary, from his wonderful article (California oriented) "Representing Borrower in Commercial Real Estate Secured Financing," in the July 2000 California CEB Real Property Reporter:

In his article, cited above, Stevens Carey makes the following suggestions for "borrower’s do’s and don’ts" in negotiation over prepayment premiums.

Carey notes that most lenders require the borrower to give prior notice of any intended prepayment. The prepayment notice should not itself accelerate the loan (or partially accelerate in the event of a partial prepayment). Rather, the instruments should provide that the effect of the notice should be simply to put the lender on notice that the borrower may be paying off the loan. Otherwise, if the borrower is relying on a refinancing or sale to effectuate the prepayment, the loan or sale closing could be delayed or may not occur at all, leaving the borrower with an acceleration demand to address.

Some loan documents impose strict and very limited timing requirements for prepayment that the borrower should attempt to soften. Among other matters, the borrower should consider: (1) How many days’ advance notice must be given; (2) Whether the prepayment must be made on a particular date or dates (e.g., a payment date); and (3) Whether all payments under the loan must be received by a certain time of day to be considered received on that day.

Carey points out that the combination of these and other restrictions may lead to shocking results.

Consider, for example, a loan providing that (1) a prepayment without premium may be made only during the last 30 days of the loan, (2) the maturity date is September 1, (3) all prepayments must be made on a payment date (which is the first day of each month), and (4) all payments received after noon are deemed received on the next business day. Under such a loan, there is actually no right to prepay without premium! Even if the free prepayment window is the last 60 days of the loan, the only time the borrower may prepay without premium is the morning of August 1 of the final year of the loan. If the source of prepayment is a loan or a sale, it may be difficult to coordinate the closing of the loan or sale to ensure that the prepayment occurs by a particular time on a particular day of the month.

Carey also recommends that the borrower should also request a window of time at the end of the loan term during which the borrower may prepay the loan without penalty. The borrower needs some flexibility to coordinate the closing of the sale or refinancing that will generate the proceeds to pay off the loan. Otherwise, it may be difficult to ensure that the funds will be available on the maturity date. Another solution to this problem is to give the borrower a free extension after the stated maturity to the extent reasonably necessary to coordinate the payoff of the loan with the closing of the sale or refinancing that is the source of the payoff. Some lenders will provide such extensions for no more than a modest processing fee.

As capital markets and mortgage markets have converged, the concept of the defeasance clause, for decades a staple in the municipal bond market has worked its way into the thinking of many mortgage analysts. Under such a clause, the borrower is permitted to substitute the security provided for a loan with another form of security. In fact, in some other systems, the right of defeasance is assumed to be part of a secured loan arrangement unless the parties provide specifically otherwise. The emerging Chinese mortgage law may so provide. See Randolph and Lou, Chinese Real Estate Law (Kluwer International, 2001) Sec. 8.8.2.3.. The Restatement of Mortgages also recommends that American common law assume that defeasance is available as a matter of right, and cannot be bargained away. Restatement (Third) of Property: Mortgages Sec. 6.2(b) (1997). The Restatement does provide that the substituted security must be readily transferrable and of equal security value to the mortgage it replaced. But the judgment as to what constitutes adequate replacement security under the Restatement ultimately is left to the courts, and not to the parties, and the parties are unable to provide otherwise. This author is less trusting of the wisdom and experience of the courts in such complex financial matters, and objects to the Restatement’s attempt to permit the mortgagor to "force feed" the mortgagee with substitute security that it doesn’t wish to accept. Even if defeasance is presumed to be available, the parties ought to be able to contract to avoid it or to limit its usage to certain agreed formats.

An example of a "defeasance clause" is set forth as Appendix D to this article.

In an article set forth following these materials in this course materials book, Professor Lefcoe points out that the defeasance practices now used by REMIC securitizers require the use of a replacement pool consisting of U.S. treasury securities and "lock out" any defeasance for the first two years. Both features are required to protect the status of the mortgage as a qualified investment. 26 C.F.R. part 1 Sec. 1,860G(8). Obviously, the securitization industry would resist the broad and mandatory defeasance rights which the Restatement of Mortgages promotes. Even if the current tax laws are changed, additional obstacles will arise in the future, and capital markets need bargaining flexibility to address these issues. There is nothing in the concept of mandatory defeasance that is so vital as to negate this flexibility. After all, mortgagors in America have essentially lived without a defeasance right for 200 years.

In theory, defeasance clauses should be subject to less judicial scrutiny than prepayment premiums, because they are not a penalty and operate more like an option. They can be used in more circumstances than the need to release property for refinancing or total or partial resale. They are not subject to a "reasonableness" evaluation under a literal application of the Bankruptcy Code, but this does not necessarily mean that they will be honored in the course of bankruptcy court ordered release of security in connection with reorganization plans. In many circumstances, the court is not required to honor the express mortgage right of the lender, but only to provide the "indubitable equivalent" of its security position, permitting the bankruptcy court to arrange for substitute security that, in the court’s view, provides adequate protection.

The securitization industry’s primary protection against this manipulation of defeasance rights in bankruptcy is to stay out of bankruptcy court, which of course is the objective of the "bankruptcy remote entities" that are a staple in many modern securitized transactions. Discussion of these devices is beyond the scope of this chapter.

In his discussion of prepayment issues, cited above, Stevens Carey warns borrowers about the hidden costs in the "Treasury securities-based defeasance clauses. When Treasury rates are less than the loan rate (as they usually are), then a larger principal amount of U.S. Treasuries must be purchased to generate the necessary income to service the loan. The excess price may be shockingly high (as much as 25 percent of the loan), especially if defeasance occurs early in the term of the loan and the positive spread between the loan rate and U.S. Treasury rates is significant. The price may be even higher due to constraints imposed by the loan documents and practical considerations in mixing and matching the amounts and rates of the U.S. Treasuries to the varying amounts of monthly principal amortization and interest. In very exceptional circumstances, the borrower might have no cost or even a discount if U.S. Treasury rates have risen sufficiently.