In commercial real estate loan transactions, as in all finance transactions, prepayment of a loan may result in unanticipated economic consequences to the lender, including loss of the bargained-for interest payment, increased tax liability and costs associated with reinvestment. New York’s common law “perfect tender in time” rule, which has been settled law since the 19th century, provides a certain level of comfort to lenders in the event the loan documents are silent as to prepayment. Under this rule, the borrower has no right to pay off its loan prior to the stated maturity date absent statutory authority or an express clause in the loan documents permitting prepayment.
Of course, to further protect against the consequences associated with prepayments by borrowers, lenders frequently include provisions in their loan documents either (i) expressly prohibiting payment of the loan prior to its maturity or (ii) permitting such prepayment, at particular times, provided the borrower pays to the lender a premium or fee. Prepayment clauses, however, must be carefully drafted in order to be enforceable at all times, including after a borrower default and acceleration of the loan and after commencement of a foreclosure action.
