The loan commitment letter is
an indispensable part of every construction project and of
every acquisition of real property purchased with borrowed
money. The commitment is, in essence, a contract in which
the lender promises (in return for a non-refundable fee) to
make a loan if certain conditions are met. If, for some reason,
the lender does not fund the loan, the result is usually a
financial disaster for the borrower, sometimes leading to
bankruptcy, litigation, or both. Obviously, the borrower needs
an enforceable commitment letter he can rely on.
Consequently, the wording of the loan commitment letter is
every bit as important as the wording of the purchase contract.
It is, therefore, important to read the commitment carefully
and to negotiate the modifications necessary to protect your
As a borrower, there are three areas of particular concern:
(l) Is the commitment enforceable?
(2) Can you satisfy the conditions for funding?
(3) Are you giving away your ability to negotiate fair loan
Your commitment is worthless if it is not enforceable. The
lender could refuse to fund if it changes its mind about the
feasibility of the project, finds that interest rates have
increased, or decides that it just does not want to fund for
any other reason. Unfortunately, this does happen.
In order to be enforceable, the commitment must contain all
the material terms of the loan. For example, it must contain
the name of the borrower, the exact amount of the loan, the
interest rate, and the terms of repayment. One recent case
held that a commitment letter tying the interest rate to the
lender's "standard interest rate quoted from time to
time" was not specific enough and the commitment was
unenforceable. In order to avoid this problem, it is best
to specify exact terms whenever possible rather than "standard
rates," or "usual or customary terms," and
Every commitment letter sets forth an exhaustive list of conditions
that must be satisfied before the lender has a duty to fund
the loan. Sometimes these conditions are so comprehensive
and numerous that is seems impossible to satisfy them all.
As a borrower, however, it is critical that you review each
and every one of these conditions to assure yourself that
you will be able to satisfy them and, more importantly, that
you will be able to document that they have been satisfied.
You should try, whenever possible, to eliminate conditions
that must be satisfied "to the lender's satisfaction,"
or which give the lender the right to refuse to fund if it
"deems itself insecure," or which are based on other
discretionary determinations by the lender. These kinds of
provisions can give the lender an opening to refuse to fund.
Commitment letters will often provide that the loan documentation--such
as the note, the deed of trust, and the loan agreement--will
utilize the lender's standard forms, or that the documentation
will be prepared to the satisfaction of lender's counsel.
These provisions should be qualified to allow reasonable input
from your own counsel. Otherwise, you may be agreeing in advance
to dangerous and unreasonable provisions that your own counsel
may be powerless to protect you from.
The commitment letter is an important part of nearly every
major development of acquisition. It should be reviewed carefully,
preferably by your own legal counsel, and its terms negotiated
so that you have a fair and enforceable commitment with terms
you know you can satisfy.
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