Getting to grips with the new LMA real estate finance intercreditor agreement

A new recommended form of intercreditor agreement for use in real estate finance transactions, the ‘REF Intercreditor’ (and user guide), has been launched by the LMA. The REF Intercreditor ranks creditors’ debt and their entitlements to the proceeds of any guarantees and security, and controls aspects such as when and by whom security might be enforced and when payments can be made by a borrower to a given class of creditor.

What is the background to the launch of this document?

The LMA REF Intercreditor has been produced in response to demand from market participants as a result of the increasing prevalence of loans provided via a combination of senior and mezzanine finance in real estate finance transactions. Despite the range of lending structures seen in the market, LMA members felt that a basic formulation of a standard form template, which is intended to be used as a starting point for negotiation only, would benefit the market by enabling the parties to focus on the key commercial terms.

In which circumstances can the REF Intercreditor be used?

The REF Intercreditor is designed to be used alongside the LMA's recommended form of facility agreement for real estate finance multi-property investment transactions.

The document is based on certain assumptions and has been prepared on the basis of one of several structures which are currently seen in the real estate finance market (as described in the user guide). It includes various optional provisions which may or may not be included in any particular transaction so that lawyers drafting an intercreditor agreement for real estate finance transactions can select the clauses that are needed for their particular transaction. The document is very much a starting point for drafting and negotiations and will require tailoring for each transaction.

What are the key provisions of the REF intercreditor?

The REF Intercreditor is drafted on the basis of a structural subordination structure where the senior debt and mezzanine debt are made available at different levels in the borrower group's corporate structure.

The layers of debt that it regulates are:

  • a single currency senior term facility (defined as the Senior Facility)
  • any arrangements to hedge interest rate liabilities in relation to the Senior Facility (defined as the Hedging Agreements)
  • a single currency mezzanine term facility (defined as the Mezzanine Facility)

Payments and security are ranked as follows:

  • first, the liabilities under the Senior Facility and the Hedging Agreements (pari passu), and
  • secondly, the liabilities under the Mezzanine Facility

What are the key differences between the REF Intercreditor and the Leveraged Intercreditor?

The LMA used their recommended form of intercreditor agreement for leveraged acquisition finance transactions (senior/mezzanine) (the Leveraged Intercreditor) as a starting point for preparing the REF Intercreditor so that market participants would be familiar with the boilerplate of the document. However, there are significant differences between the two documents since they address different markets.

The REF Intercreditor is shorter than the Leveraged Intercreditor (being about two thirds of the length of the Leveraged Intercreditor). This is because, although the REF Intercreditor is based on the Leveraged Intercreditor, there are various provisions from the Leveraged Intercreditor that are either not commonly encountered in real estate finance or are dealt with differently. These clauses (some of which are listed in the REF Intercreditor user guide) have not been included in the REF Intercreditor but can, if necessary and appropriate, be adapted and incorporated into the REF Intercreditor.

The REF Intercreditor contains various optional provisions which are not included in the Leveraged Intercreditor, for example:

  • provisions allowing the mezzanine lenders to remedy certain events of default under the senior facility agreement during a cure period and restricting the enforcement rights of the senior creditors during that cure period (clause 5.7 (Cure Rights: Mezzanine Creditors) and clause 3.6(a)(v) (Restriction on Enforcement: Senior Creditors))
  • provisions allowing the mezzanine lenders to enforce their security over shares (part of the mezzanine security package) without triggering a change of control under the Senior Facility Agreement (clause 5.10 (Acquisition))

What effect will the launch of the REF Intercreditor have on the documentation for real estate finance facilities?

For transactions using structural subordination, the REF Intercreditor will be a useful starting point for drafting and will go some way to assist with the standardisation of intercreditor documentation for real estate finance facilities. However, structural subordination is not the only intercreditor arrangement seen in real estate finance and the new document will not be appropriate to every deal.  Also, the length of the document, and its perceived complexity, may mean that parties are reluctant to use it for transactions at the lower end of the market.

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

 

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