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Cross the T’s and Dot the I’s – Loan Agreements

All the terms have been agreed to and now it’s time to cross all the T’s and dot all the I’s.  The next step in the borrowing process is to review the loan agreement.  It can be as short as one page or the next edition of War and Peace.

Regardless of the size, it’s important that you review this agreement with a professional business advisor.  Of note, I want to highlight some key provisions outside of the normal interest rate, term and repayment schedule sections which should be understood.  Below is an overview of a few of the important, but not as well understood provisions:  

  • Default Provisions – these are the situations that put you in default with the lender (e.g., bankruptcy, closing a business, not providing required financial reporting); this will trigger automatic repayment or default interest (see below); 
  • Default Interest – this is the interest rate that the lender will charge when you are in default under the loan; it is typically 2% or more on top of the loan’s base interest rate; 
  • Negative and Positive Covenants – these are the things that you must (Positive Covenant; e.g. providing financial information, keeping assets in good working order, reporting under certain accounting standards) and cannot (Negative Covenant; e.g. selling assets, incurring more debt, paying dividends) do while the loan is outstanding;  
  • Guarantees and Securitization – this is where an individual or a company guarantees payment of your loan in the event you or your company defaults; you may also execute and file a security agreement for your assets as well (e.g. a security agreement and UCC filing).
  • Prepayment Terms– this governs when or if you can prepay your loan before the term expires; sometimes a lender will prohibit repayment for an initial time period or they may let you prepay with a penalty payment.

There are other provisions in the loan agreement which are also important to understand in addition to the items listed above.  As mentioned earlier, I highly recommend that you engage a professional business advisor to review your loan agreement prior to execution.  Many times, there are terms that can be negotiated and provide more flexibility for you and/or your organization.   

Next week, we will review the closing process and some of the peripheral agreements and documents you may be required to execute.

Term Sheets and Commitment Letters – Not the Same, But Both Important

Term sheets and commitment letters are often used interchangeably, but they serve two purposes.  The term sheet will lay out preliminarily what the lender will provide in the way of financing and also outlines your obligations.  The commitment letter is the next step where the lender says they are comfortable with lending you the money and are ready to close.  Below are more details on each. 

The term sheet is the lender’s overview of what will be included in your financing package.  Below are typical items that will be provided:  

  • Borrower information
  • Size of financing
  • Interest Rate
  • Term
  • Prepayment option/penalty
  • Assumptions that need verified
  • Covenants (i.e., what you can and can’t do during the lan)
  • Closing deliverables; and
  • Required guarantees and security interests

Of course, the lender will want to verify everything, which is why a term sheet is just a preliminary and non-binding commitment. 

A commitment letter is the next step in the process where the lender has approved the loan and is ready to close.  There will typically be disclaimers that are inserted (e.g., if the business closes or something that materially changes the conditions required to close the loan).  However, once you receive the commitment letter, the odds are high that you will go to closing. 

Next week, we will review the loan agreement in more detail and highlight some of the key provisions. 
 
Other items of interest

As always, please don’t hesitate to email myself (jsanders@mpl-law.com), Andy Miller (amiller@mpl-law.com), Christian Miller (cmiller@mpl-law.com), Erik Spurlin (espurlin@mpl-law.com), Brad Leber (bleber@mpl-law.com) or anyone in our office with questions or comments.   

Please see all of our prior updates at this link or if you would like to be added to our email list, please click here.

You Could Be Next if You Don’t Watch Out

May’s jobs report just added more evidence that rate cuts anytime soon are unlikely to happen.  Higher interest rates, like inflation, appears to be sticking around.  A recent report by the AP also shows that the list of publicly traded companies with serious debt issues (aka Zombie Companies) continues to grow. 

If you believe this elevated rate environment will persist and have floating rate debt, you should probably look to refinance or lock in the best interest rate possible.  Over the next few weeks, we will review the key documents that a company or organization will encounter as it borrows money or refinances/issues debt. 

Below is a rundown of the topics:

  • Commitment Letter / Term Sheet – this is the letter from the lender to the borrower outlining the key terms and conditions of the loan (sometimes its also called a term sheet)
  • Loan Agreement – this is the main lending document that sets out the terms of the loan, the borrowing and repayment process, obligations of the lender and borrower and events of default
  • Promissory Note – this item documents the borrower’s obligations under the loan agreement
  • Guaranty & Collateral Documents – these are the additional promises made by the borrower and/or related parties to repay the loan or debt; there are also security agreements which outline the lenders position on the borrower’s assets (e.g., UCC, DACA, Perfection Certificates, etc.)
  • Other Documents – these documents can include a resolution approving the loan package, opinion of counsel, flow of funds, solvency certificates and so on. 

Navigating the rising interest rate environment with an experienced commercial lender, investment banker, business attorney and/or a business financial advisor will pay dividends in the long run.  
 
Other Items of Interest

As always, please don’t hesitate to email myself (jsanders@mpl-law.com), Andy Miller (amiller@mpl-law.com), Christian Miller (cmiller@mpl-law.com), Erik Spurlin (espurlin@mpl-law.com), Brad Leber (bleber@mpl-law.com) or anyone in our office with questions or comments.   

Please see all of our prior updates at this link or if you would like to be added to our email list, please click here.

It’s Summer, Don’t Forget To Network

It is hard to believe, but Summer has officially started.  Over the next few months, you will be travelling, relaxing at the pool, and probably seeing people that you don’t normally see during the Winter months.   While you might not want to think about it, this is a great time to network.  You never know what will come about from your conversations, but here are a few tips that may be of use:

  1. Don’t get into conversations to try and get business (unless that is the purpose of the conversation).  It comes off as very “salesy” and is a big turnoff for people that you talk with.
  2. Ask open ended, but targeted questions.  People in general love to talk about themselves and asking about them is an easy way to keep a conversation going.  You might learn a little about their business as well.
  3. If you are having a good conversation, ask if you can follow up at a later time (and make sure you do).  People will generally respect the follow through.
  4. Last, but not least, when you are in a conversation, remember that you have two ears and one mouth….use them in proportion. 

Other than that, below are some helpful networking articles:

A few things that may be of interest: 

As always, please don’t hesitate to email myself (jsanders@mpl-law.com), Andy Miller (amiller@mpl-law.com), Christian Miller (cmiller@mpl-law.com), Erik Spurlin (espurlin@mpl-law.com), Brad Leber (bleber@mpl-law.com) or anyone in our office with questions or comments.  

Please see all of our prior updates at this link or if you would like to be added to our email list, please click here. 

Seller Beware

You are ready to put you home on the market. You may hire a real estate agent to help you sell, or you may decide to sell it on your own. Either way, you will need to complete a Seller Disclosure and give it to the buyer before the Agreement of Sale is signed.  A seller needs to take this document seriously because failure to do so can get a seller into big trouble.  

Pennsylvania has a Real Estate Seller Disclosure Law that sets out what a seller must disclose for the sale of residential real property [68 Pa.C.S. §7301 et seq.]. Specifically, a seller must disclose all known material defects about the property being sold that are not readily observable. A “material defect” is “a problem with the property or any portion of it that would have a significant adverse impact on the value of the residential real property or that involves an unreasonable risk to people on the land.”

For example, if you know that your basement leaks, you must disclose that defect. If you do not disclose the defect, you could end up paying the buyer to repair the defect and for any damage that occurred. To make matters worse, Pennsylvania courts have determined that a violation of the Real Estate Seller Disclosure Law can be considered a violation of the Unfair Trade Practices and Consumer Protection Law, which allows a buyer to recover attorney’s fees and possibly triple damages. Keep in mind that the required disclosure of known material defects includes not just your home, but also the land. So, if you have a large tree that you know is rotten and in danger of falling, you need to disclose this defect even if it is not covered in the Seller Disclosure. Otherwise, you could be liable for the cost to remove the tree or for any damage caused by the tree falling down.

In addition, selling your house “as is” will not exempt you from disclosing material defects under the Real Estate Seller Disclosure Law.  Phelps v. Caperoon, 190 A.3d 1230 (Pa. Super. Ct. 2018).  Keep in mind that the duty to disclose a material defect continues up until the date of settlement. So, if a material defect happens between the signing of the Agreement of Sale and settlement, a seller must disclose that defect.

So, what should a seller do?

  • Err on the side of disclosure. A good guideline is to ask yourself if you would want to know about a particular past or current problem.  If you would, then include the problem and resolution in the Seller Disclosure.
  • Keep records of major repairs or renovations.

In conclusion, it is important to always be on the safe side when it comes to the duty to disclose when selling your real property. It is best to be transparent and disclose any known past or present problem at any point prior to signing the Agreement of Sale.  This is the best way to protect yourself from future litigation.