The LMA REF intercreditor agreement for contractual subordination

The LMA REF intercreditor agreement for contractual subordination

Andrew Besser, partner and head of real estate finance (REF) at Olswang, reviews the background to the new form of agreement recommended by the Loan Market Association (LMA) for use between creditors in REF and outlines the circumstances in which it is to be used.

Original news

The LMA has announced the launch of a new recommended form of intercreditor agreement for real estate finance transactions, the REF Contractual Intercreditor Agreement. The agreement, for use in conjunction with the LMA’s Recommended Form of Facility Agreement for REF multi-property investment transactions, uses the same boilerplate as the LMA Recommended Form of Intercreditor Agreement for the leveraged finance market.

What is the background to the launch of this document?

There was concern particularly in the light of the 2008 financial crisis that the intercreditor agreements that were drafted before that time were inconsistent and that therefore there was lack of clarity and certainty. This led to a lot of litigation.

There was therefore a call for a more standardised approach both to the structure of intercreditor arrangements and consequentially documentation.

Accordingly, the LMA took the reins and brought out a precedent document in 2014.

However, the existing form of intercreditor agreement produced by the LMA predicated only one structure known as structural subordination. It was also only forward looking to future transactions.

This meant that the document was not suitable for all situations in which an intercreditor agreement would be relevant—for example, where structural subordination was not available or appropriate.

Because this document was the only precedent available, to some extent it was driving the market to the structural subordination route, even if on occasion it was not the most appropriate.

In which circumstances can the REF contractual intercreditor be used?

It is this background that led the LMA recently to introduce the REF Contractual Intercreditor Agreement. The REF contractual intercreditor can be used in those transactions where the parties do not want to adopt a structural subordination and where the parties want to rely on a contractual subordination. The most common examples would be firstly where there is an existing senior or mezz structure already in place. Here, the parties may be amending and restating arrangements and would like to use the terms of the new documentation but it is not appropriate to restructure the asset owning stack. It is also useful f

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About the author:

Meet Suzanna:

1. Banking and finance lawyer with experience in real estate finance, trade finance and aviation finance

2. Likes skiing, comedy shows and listening to live music

3. Thinks the law is not for the fainthearted

Suzanna has wide-ranging experience in banking and finance transactions with particular emphasis on advising lenders in the context of real estate finance and trade finance, and advising on ECA supported aviation finance transactions. Suzanna qualified as a solicitor in 2001 with Theodore Goddard (now Addleshaw Goddard LLP) and has since gained experience with Barclays Bank PLC, ECGD and Crédit Agricole CIB before joining LexisNexis.