Loan documents are filled with boilerplate provisions intended to preserve the lender’s return in any applicable loan transaction as net of extraneous costs and expenses that the lender may incur in connection with the loan. In addition to carveout guarantees that address certain losses a lender may suffer by virtue of a borrower party’s particular actions taken in defiance of specific terms of the documents, loan documents also include catch-all provisions imposing liability on a borrower for costs and expenses incurred by the lender that relate to the lender’s ownership of the loan or participation in the loan transaction itself. While our articles frequently focus on market-driven drafting considerations, we focus this month on seemingly basic lender indemnification provisions and how different practitioners and courts may approach such matters.
Certain expenses of a lender in connection with general, ongoing servicing or administrative costs of holding a loan are routinely passed on to the borrower. For example, a lender’s costs, expenses and attorney fees incurred in connection with its review of approvals or modifications requested by a borrower are regularly reimbursed by borrowers without significant objection or negotiation. Some expenses of a lender, however, though associated with an extension of credit, are outside of a borrower’s purview and may cause challenges for a lender attempting to recover such costs. For example, commercial mortgage-backed securities (CMBS) lenders may, without informing the borrower, enter into hedging transactions, including interest rate swaps, that protect against fluctuations in the interest rate markets subsequent to the applicable rate-lock or closing and prior to final securitization.
