Whether you are a Lender or a Borrower, it’s obviously very important to know what terms are included in your Loan Documents and how they may affect your interests. Periodically, I will be blogging on issues and concerns regarding Loan Documents and areas that I believe everyone needs to be particularly focused on.
Today, I’d like to highlight Casualty provisions. Most mortgages in Pennsylvania have provisions regarding what happens if a casualty or damage occurs to the mortgaged Premises. This is important for both Lender and Borrower.
For a Lender, the wording of a casualty clause could determine the manner in which insurance proceeds will be distributed, and if Borrower is required to use them in particular ways, or are free to use them as they see fit. Lenders typically prefer to have control in instances of a casualty and over any potential insurance proceeds. A casualty could detrimentally affect what is potentially a Lender’s most valuable piece of collateral, and taking steps before something goes wrong could save the Lender a lot of aggravation and money.
On the flip side, a Borrower also wants the ability to control any insurance proceeds. A casualty clause unfavorable to a Borrower may prevent it from receiving any of the insurance proceeds at all and Borrower will be at the mercy of the Lender if it wishes to rebuild the damaged property. Depending on the language in the casualty provisions, the Borrower could find itself in the unenviable scenario whereby all of its insurance proceeds are used to pay down the loan and now Borrower is left with the remaining debt and no building on the Premises to create income for the business.
It’s important whether you’re a Lender or a Borrower to have good representation assist you in reviewing, drafting, or negotiating your Loan Documents.
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