Analysing the latest form of LMA real estate finance investment facility agreement

Clive Wells, partner, and Paul Carroll, associate, both at Skadden, Arps, Slate, Meagher & Flom (UK) LLP, examine the key changes that have been made to the Loan Market Association’s recommended form of facility agreement for real estate finance multi-property investment transactions.

What are the key changes that have been made to the recommended form of facility agreement for real estate finance multi-property investment transactions?

The revised recommended form of facility agreement for real estate finance multi-property investment transactions includes a number of general updates and amendments ranging from minor drafting corrections to market-driven additions.

A version of the provisions relating to ‘debt purchase transactions’ which were included in the Loan Market Association (LMA) leveraged facility agreement a number of years ago have now been incorporated into the real estate facility agreement. These provisions essentially prohibit a borrower or members of its group from buying back its own debt. The provisions also cover the scenario where a ‘sponsor affiliate’ purchases such debt and provides for the disenfranchisement of such sponsor affiliate in order to avoid conflicts of interest where the lender syndicate is voting on issues relating to such debt. Importantly, the drafting of this amendment does not include the option contained in the leveraged precedent allowing the borrower or a group member to buy-back its debt subject to disenfranchisement.

The amendments also include:

  • the addition of an undertaking relating to ‘asset managers’, along with related definitions and documentary conditions precedent requiring a copy of the appointment of the asset managers and a duty of care agreement between the asset managers, the borrower and the security agent—this reflects the fact that, in addition to having managing agents for individual properties, lenders will require the appointment of an asset manager who oversees the property portfolio
  • the addition of a footnote relating to the definition of ‘lender’ referring to provisions on defaulting lenders and impaired agents (that are included in the leveraged precedent) which the parties may wish to include
  • amendments to the insurance undertaking bringing it more in line with current market practices for example, reflecting the fact that insurance premia may not be paid prior to the commencement of an insurance period
  • the removal of references to the security agent’s ‘delegate’ throughout the document
  • an amendment of the representation relating to ranking of security—this is now subject to the legal reservations and the newly introduced ‘perfection requirements’
  • similarly, the governing law representation is now subject to the legal reservations
  • an amendment of the property maintenance undertaking which requires the borrower to carry out such energy efficiency improvements as are necessary to ensure the property can be let without breaching any applicable regulations—in a similar vein, the development undertaking has been amended to permit alterations or improvements, which a tenant is entitled to undertake in accordance with the terms of its lease
  • an amendment to the release clause which provides for the release of all liabilities and obligations of an entity which ceases to be a member of the borrower group, and
  • the addition of certain new condition precedent documentation requirements in the form of energy performance certificates (EPCs) relating to each property and certain documentation relating to the asset manager, as referenced above

What is the background to the new provisions?

The new provisions are included principally:

  • as a result of feedback received from stakeholders
  • to reflect current trends in the market, and
  • to bring the documentation in line with other LMA facility agreements

What is the effect of the new provisions?

The new provisions incorporate into the precedent many items which would have previously been incorporated by practitioners on a deal-by-deal basis, in accordance with market practice.

Are any of the new provisions likely to be subject to negotiations?

In general, the amendments should not be controversial and generally seek to either reflect current market practice or regulatory amendments. Certain new provisions may be of greater importance to particular clients, in particular the provisions relating to debt purchase transactions, and such parties may seek to negotiate such provisions to include an option allowing the borrower or a group company to buy back its own debt. In general, it would be expected that the majority of the changes made to the agreement will be accepted by the market.

What should lawyers take note of, in particular?

Lawyers should ensure they advise their clients of the amendments which have been made to the recommended form of agreement, particularly those which introduce new obligations on their clients, such as the previously mentioned insurance and energy efficiency related amendments. Lawyers should also advise their clients of the implications of the prohibition of ‘debt purchase transactions’. Alerting a client of the amendments will be particularly important where a client is familiar with the old form of agreement.

Interviewed by Susan Ghaiwal.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

First published on LexisPSL Banking & Finance. Click here for a free trial.

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