By:  Susan Marra

Negotiating loan terms can be an uphill battle for a commercial loan borrower. The lender has the money and the leverage.  That said, in most cases the borrower will have the most power at the beginning of the transaction.  At that point, the lender understands that there may be multiple lenders competing to make the loan, and to obtain the borrower’s business it must be flexible.  Therefore, it is an important strategy for the borrower to negotiate the loan terms before it signs the loan commitment.

Loan commitments where the lender agrees to loan money with minimal conditions are rare.  Many times loan commitments are issued before the lender has conducted due diligence, such as obtaining appraisals and environmental reports, and contain many conditions.  More often, borrower and lender are negotiating a term sheet which sets out the terms of the loan without binding the lender to grant the loan.  Typically term sheets are not binding, whereas commitments are.  However, term sheets may contain binding provisions, such as a confidentiality provision with respect to lender’s review of the borrower’s financial information.  In any event, it is important that negotiation of the loan terms begins before the payment of a deposit or the execution of a binding agreement.

The commitment will contain the key terms of the loan, such as the amount of the loan, the interest rate, the method of repayment, and collateral for the loan. It is usually in the lender’s interests that the commitment be as general and vague as possible. This will give the lender maximum flexibility when drafting the loan documents. Many times the commitment contains a provision that the loan documents will be satisfactory to the lender or that they will be drafted using the lender’s standard form documents. Since lender’s satisfaction cannot be quantified, and the loan documents are not available at the commitment phase, it is in the best interests of the borrower to have as detailed of a commitment as possible.  If an issue is addressed in the commitment, the lender will be unable to impose more stringent loan terms on borrower in the loan documents.

An attorney serves an important role in the negotiation of a loan commitment and should be retained as early in the process as possible when the lender is most open to negotiation of the loan terms.  Many an attorney retained after the execution of a loan commitment has had to relay the bad news to his or her client that the lender is not obligated to negotiate a term in the loan documents not addressed in the commitment.  However, borrowers should be realistic in what changes even an experienced (and persuasive) attorney can convince a lender to make to its standard loan documents. The inclination or ability of the lender to negotiate the loan terms depend on many factors, including the type of loan (securitized or not), size of the loan, the lender’s standard practices, the financial strength of the transaction or the borrower, and the relationship of the borrower with the lender.

This publication is intended for general information purposes only and does not constitute legal advice. The reader should consult legal counsel to determine how the law may apply to specific situations.