February 4, 2016
Prepayment premiums are alive and well, although sometimes subject to some courts' willingness to strictly construe them against secured lenders, usually to find “value” for other creditors of the lender’s borrower. Recent decisions leave a fairly clear road map for lenders preparing loan documents. The documents must contain language expressly providing for payment of a premium, as one cannot rely on the courts to imply the existence of such a right or to find a right to damages for violation of the perfect tender rule.

Prepayment or “make-whole” provisions should be tied to a formula aimed at calculating the lender's anticipated losses due to early payment, should recite the sophisticated nature of the parties, and acknowledge the parties' understanding that it will be difficult to calculate the lender's damages in the event of a default. The documents should clearly state that the premium shall become due and owing upon acceleration, whether voluntary or involuntary.

Finally, the prepayment or “make-whole” provision should clarify that it is due and owing upon acceleration regardless of whether any actual prepayment is made.

To view the full article, click here.