Richard Francis, Senior Account Executive
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In order to reduce, transfer and mitigate any risks associated with Real Estate finance transactions; Lenders more often than not adopt the standard insurance obligations as set out by the Loan Market Association (LMA).
In this dispatch, we highlight some of the considerations that Borrowers, Lenders and their Advisors should be mindful of both pre and post deal closing.
Commercial lenders and their advisors have increasingly become more insistent on both understanding and imposing insurance obligations when considering a loan facility. This has led to the provision of a User Guide by the LMA for insurance broker letters, which are intended to cover said obligations.
From the outset, it is important to highlight that the standard insurance obligations as set out by the LMA are merely a starting point, and should be approached as such by all parties. Brokers, acting on behalf of their client the Borrower, should therefore be engaged as early on in the process as possible.
Lenders and their advisors should also be mindful of the potentially long, drawn-out negotiation process whereby Brokers, utilising a company letter to confirm the obligations, will be seeking to limit their liability whilst ensuring their client’s position is not diminished or exposed to onerous conditions.
Furthermore, the insurance provider will be required to agree to clauses which either alter the terms and conditions under which the policy was originally underwritten, or involve additional, often administrative, obligations. This adds to the complexities of reaching a satisfactory outcome without delaying the transaction.
Too often, insurance Brokers receive an email late on in the deal process. Brokers are only concerned with commenting on and confirming that the insurance policy is compliant with the relevant obligations as set out in the Facility Agreement. Therefore, it is frequently overlooked that there are ongoing obligations incumbent on the Borrower only, and not the Broker.
Such obligations include, for example, prompt notification to the Lender of the proposed terms of any future renewal or material amendment. Administratively, given the likely scenario for multiple Lender agreements to be in place, particularly for large fund managers, property investors and real estate investment trusts, Borrowers are unlikely to be able to fulfill these obligations.
It is therefore imperative that Borrowers are engaging Brokers or external consultants, who understand these conditions and the implications of not adhering to them, at the earliest opportunity.
Whilst the LMA insurance broker letter template provides a starting point, it is not entirely fit for purpose, despite being recommended as such. Brokers, who are not party to the Facility Agreement itself, and who are only able to place insurances at the instruction of their clients, are required to disclose details of their professional indemnity insurance. This exposes the Broker to liability for undertakings that go beyond the insurance policy and for which they are merely acting as an intermediary.
Guided by internal legal counsel, the limits and obligations agreed to will be scrutinised. Resultantly, a number of the standard obligations end up being carved out, thus deviating away from the original intention of standardising and streamlining the process.
As discussed, utilising an insurance broker letter may cause delays in negotiating a satisfactory outcome between Borrowers, Brokers, Lenders, and Insurers; however, there are alternatives available.
Lenders should be mindful of the advice in the LMA’s User Guide whereby an insurer letter, as opposed to a broker letter, is preferred. Confirmations with respect to the various obligations are done directly by the insurance company providing cover without limitations or caps in liability.
Lenders also have the option of seeking an independent Insurance Due Diligence review via a broker or consultant specialising in real estate transactions and who understand not only the exposures but where and why potential complications may arise.
Real Estate finance investment transactions are accompanied by potentially onerous insurance obligations for all parties involved. This can either delay the overall process, or worse expose them to unnecessary liability.
Howden Real Estate Practice is well-positioned to provide holistic insurance broking and Due Diligence services for the full lifecycle of investment finance transactions.