Enforcement of a Commercial Loan After the Property Securing the Loan is Sold or Transferred
Enforcement of due-on-sale clauses started growing in popularity in the 1970s as a result of instability in the economy and rising interest rates. To circumvent higher interest rates, borrowers resorted to alternatives to conventional bank financing, such as mortgage assumptions. Because of this trend, lenders began exercising their rights contained in the due-on-sale clauses of their loan documents and requiring the balance of their loans to be paid in full when properties were sold. In response, borrowers mounted challenges to such clauses as against public policy for unreasonably restraining alienation of property.
Considerations in Connection with Bankruptcy Remote Entities
The “bankruptcy remote entity” can be a useful tool for lenders to lower the risk profiles of their borrowers. A bankruptcy remote borrower typically will, at the lender’s request, include in its operating agreement a provision that requires a unanimous vote by the borrower’s members before the borrower can seek bankruptcy protection. One of those members must be “independent” and approved by the lender at origination. This structure is intended to give the lender comfort that the borrower will not seek bankruptcy protection.
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