This blog is not a strictly legal blog.
It is nevertheless about a topic firmly to do with legal documentation, in response to a question we are often asked , in particular by our non-Dutch lender client base: What loan documentation should we use to document our Dutch commercial real estate loan?
In the Dutch market, loan documentation used to document commercial real estate loans can range from:
- full blown (English or Dutch law variety) LMA loan documentation (at around 120-200 pages, depending on the deal and on whether clauses dealing with syndication, agency and other administrative parties are required);
- Dutch “short-form LMA” (typically somewhere in between 40-100 pages, depending on the deal and on whether syndication clauses, agency and other administrative parties clauses are required);
- lender’s in-house loan agreements (usually shorter than LMA and may range anywhere from a 10 pager to something resembling a short-form LMA variety); and
- loan offer letters (around 10 pages),
Dutch short-form LMA is not an “official LMA brand”. It is the term used in the Dutch market for Dutch law governed LMA style loan agreements developed (initially) amongst Dutch banks and their legal advisors. In-house loan agreements or loan offer letters are often combined with lender’s general conditions. General conditions could range from a bank’s bilateral credit and general banking conditions to general terms that effectively include very much the same provisions one would expect to encounter in an LMA style loan document and which are less likely to have to be tailored to the deal, so that the loan agreement or loan offer letter itself can remain limited to deal specific clauses usually including: provisions around utilisation, repayment, interest rates and interest fixing, deal specific fees, sometimes account provisions, the agreed security package and, other than for smaller sized loans, financial covenants.
In terms of financial covenants, it is fair to say that since the credit crisis, these have become more detailed and fleshed out in loan documentation, also for the midsize and smaller CREF loans. The background of this is that in a default scenario, it will be a lot easier to accelerate the loan at least in part if there is a clear financial covenant default in cases where the borrower is still paying, but where, by looking at the value of/cashflow from the real estate financed a borrower payment default/insolvency awaits around the corner. This often helps in getting the borrower’s co-operation towards achieving a restructuring and may also lead to a higher bid from a buyer should the lender wish to sell its defaulted loan.
The concerns at the root of the question on what loan documentation to use are usually a combination of the following:
- my borrowers would like their documentation short and sweet (this is certainly true for Dutch CRE borrowers, particularly where smaller and midsized loans are concerned and to a good extent also for larger senior loans);
- leaner documents would also save time and (lawyer’s!) costs; however
- will a shorter loan document include all the protection we need to comply with our own risk policies and any applicable regulations?;
- will a shorter or somewhat different than “usual” looking loan document be sufficient in order for us to fund or leverage our loan and will it get in the way of an exit we may seek on the loan e.g. by way of transfer to other lenders that are commonly in the market for such loans or maybe a more elaborate syndication or a securitisation.
In addition, we are often asked the question about the pros and cons of using an English law governed loan document compared to a Dutch law governed loan document for a Dutch CREF loan, also in light of Brexit.
When considering your options, the below overview may help. This overview reflects at least my own views from personal experience over the past 20 odd years but do feel free to share any comments that you may have on it also for the benefit of other readers. I have tried to be fair and not to preach to the choir and support my own business case as a Dutch private practitioner.
Full blown LMA loan documentation
- Tried and tested, generally accepted by Dutch and foreign CREF lenders alike
- Loan on loan lenders tend to prefer LMA and are less familiar with the alternatives
- Sometimes preferred by US/UK borrowers active on the Dutch market, also good level of acceptance amongst more experienced Dutch borrowers, at least for large CREF loans with a somewhat higher risk profile
- May be regarded as cracking a nut with a sledgehammer and less accepted amongst Dutch borrowers where smaller to midsized CREF loans and CREF loans with a senior risk profile are concerned
- Can add substantially to legal costs, whilst not necessarily adding real additional comfort for a lender especially for the more straightforward CREF loans
- Frustrating exercise (both sides!) with less experienced borrowers that would not have negotiated general conditions with similar contents, but out of general concern will then sometimes want to negotiate what are actually boilerplate LMA clauses
Dutch “short-form LMA”
- Shorter than, yet sufficiently looks like an LMA document to comfort US/UK lenders
- Can only really be substantially shorter if there is no need for detailed syndication and administrative party clauses (i.e. loan still needs to be transferable, but less likely to be syndicated, will most likely remain bi-lateral)
- Still a lot of text to process and, even though often offered as a compromise to borrowers averse to lengthy loan documentation, the cons of an LMA document set out in the two last bullets above, will to a degree also apply here and therefore arguably still overkill for midsized to smaller and truly more straight forward CREF loans
Lender’s in-house loan agreements
- Tailored to lender’s own needs, documentation quality might vary though from lender to lender (sometimes leaving external counsel the job to amend without causing insult, also not easy to send an invoice for that sort of work…)
- Some lenders have longer-form loan documents that effectively do not differ much from LMA or Dutch short-form LMA
- For less straightforward deals, some work may be required to tailor the document to the deal in any case, thereby defeating the purpose of an in-house standard document (it being standardised and relatively low cost to use) somewhat
- Use of general conditions may save time and costs, Dutch borrowers tend to negotiate them less than an actual loan agreement and are often quite surprised to find out that the average set of general conditions are more strict than LMA
Loan offer letters
- Short and sweet, adds to competitive edge, particularly in the mid-market and with traditional Dutch borrowers borrowing low LTV CREF loans
- If well drafted and combined with general conditions, not necessarily offering less in terms of lender comfort (yes really!)
- Can also be drafted to suit loan on loan leveraging, syndications and securitisations through including required provisions for that purpose in general conditions, question though as to how to convince your relevant intended loan on loan lender, potential syndicate or securitisation advisors of this (psychology must not be underestimated, once sat with a London investment banker and his in-house counsel, exercised through the loan offer letter and general conditions we had prepared, they agreed that nothing appear to be missing, but it still did not feel quite right…)
- Saves time and costs
- May also help towards building up a loan portfolio with loans entered into largely on same terms as borrowers general tendency will be not to negotiate general conditions
- Less suitable for larger syndicated CREF loans or loans that would still require a lot of tailored terms, in that case costs may eventually end up higher in order to provide the tailored comfort required.
The concerns, pros and cons of using an English law document for a Dutch CREF loan are a somewhat different matter. In summary, the below, fairly reflects the position, allowing parties to consider what is right for them.
English law CREF loan agreements
- Definitely workable if preferred, but may still require substantial input from Dutch counsel where Dutch borrowers and properties are concerned
- Most Dutch CREF borrowers will prefer a local law governed loan document, this is what they know and feel comfortable with, especially where purely Dutch property financings are concerned
- Working with an English law CREF document can add substantially to and will to an extent double up some lawyer’s costs, UK lawyers rates are typically higher than those of the Dutch law firms, using a UK firm with lower rates but also less experience in cross-border/Dutch CREF financing may seem more cost efficient but often tends to end up being less so, as more consultation will then usually be required between UK lead counsel and Dutch “local” counsel (especially around property related issues and the signing and closing process, which for Dutch CREF will always mean a Dutch notarial closing, no it is not a trust, not an escrow, it is a notary letter and it needs to be in this form)
- In a worst case, this might lead to oversights between counsel
- Now that Brexit has become a fact of life, the current position/prevailing view unfortunately is that an English court judgement may have to be re-litigated before a Dutch court
- Having said this, if the loan is covered by a mortgage, you will not need a court verdict to enforce that mortgage or any Dutch asset or share security provided for that matter, Dutch security can be enforced without the need to obtain a court verdict (although a more straight forward court leave may need to be obtained depending on method of enforcement, but this would also be the case if you have documented your loan under Dutch law)
Dutch law CREF loan agreement
- Local law for what is essentially a local deal usually works out more time and cost efficient
- Some Dutch borrowers do not want to work with an English law loan agreement for their Dutch financings
- The Netherlands is on the whole quite a creditor friendly jurisdiction (truly, and also compared to the UK)
- Dutch courts (usually parties would opt for the Amsterdam courts) have sufficient knowledge handling disputes relating to commercial loan documentation
- US/UK lenders, loan on loan lenders and sometimes also borrowers may prefer to work with an English law governed loan document because this is what they know and it makes it easier for them to handle loan documentation in-house post-closing (they will typically have English but not Dutch qualified in-house counsel)
- Most Dutch and German lenders with a vested interest in the Dutch market will use Dutch law governed loan documentation for their Dutch CREF loans and syndicating their senior CREF loans to such parties, other continental European lenders or US insurers will from our experience not normally be a problem, this might be different if a lender is looking to sell (part of) a loan to UK/US loan or hedge funds, depending on their level of involvement in the Dutch/continental European market.
As said, not a truly legal blog this time, but perhaps food for thought for parties trying to gain (further) market share in our, perhaps not the very biggest, but nevertheless interesting, lively and varied CREF market.