Brown Rudnick, in its role as contributor to the Loan Market Association (the "LMA") recently chaired a discussion exploring the theme "The rise and rise of non-bank lenders" at the LMA conference on 11th May. The panel consisted of Neil-Odom-Haslett, Head of CRE Debt - Standard Life Inv, Timothé Rauly, Head of CRE Finance - AXA Real Estate, Jamil Farooqi, Co-Head of Junior Real Estate Debt - M&G and Nick Kilbey, Executive Director - Pramerica Real Estate Investors Limited and was chaired by Elena Rey, Partner, Real Estate Finance at Brown Rudnick.

The panel discussed the growth of non-bank lending to real estate since the crisis and the changing dynamics of that sector.  As a lending class, debt funds have established a niche in the market with their success in part due to faster decision-making processes and more dynamic structuring. The lending appetite for non-bank lenders varies widely, so it is difficult to draw many generalizations, however typically they can agree relatively covenant light structures and have more headroom to offer tailored facilities compared to the clearing banks and other institutional lenders. Panelists were in agreement that debt funds continue to attract investors hunting for yield in a low-interest rate environment and in a market in which yields from other asset classes are not compelling on a risk return basis. This in turn, has arguably led to a saturated debt market where competition is rife and new entrants are abundant.

The array of capital on offer has led to increased competition amongst lenders and a wide range of commercial terms and structures.  The panel agreed that the diversification of lending offerings is very positive for the resilience of the market as a whole and also for sponsors looking to secure financing for specific projects. 

As the real estate financing market continues to diversify, sponsors are turning more frequently to debt advisors to help them navigate the financing landscape.  Brown Rudnick in its role as debt advisor, helps its clients to navigate the crowded market and secure the most competitive financing terms. In one recent transaction for example, the interest rate spread on a mezzanine facility for financing the same product was over 500 bps.  The Brown Rudnick Debt Advisory team were able to negotiate a tailored covenant package as well as a competitive financing rate for our client for both senior and mezzanine facilities. In parallel the Brown Rudnick Real Estate Finance team worked seamlessly to provide early advice on the intercreditor terms and legal structure as well as documenting the deal and managing the whole transaction to a successful close.


Given the impending referendum on whether the United Kingdom should remain a member of the European Union, it is worthwhile to briefly consider certain implications for both borrowers and lenders in the UK banking market in the event that Brexit occurs.

1. Flexit clauses

Certain Lenders have attempted to introduce so called 'flexit clauses', which allow a lender to increase the interest rate that is charged on a loan should the UK vote to leave the EU. Such provisions (that allow the terms of a facility agreement to be adjusted as a result of the occurrence of an independent event) have precedent in, for example, margin loan documentation where the interest rate may adjust depending on how the relevant borrower performs or as a result of other events. Similar clauses can also be found in United States high yield documentation where, upon the occurrence of certain events, restrictive covenants may be dis-applied. However, generally, borrowers have resisted attempts by lenders to introduce Flexit clauses (as well as Brexit events of default or Brexit-specific prepayment events) during the negotiation of the terms of the financing documents, successfully arguing that Brexit would not significantly impact particular financing or that the relevant risk has already been priced into the deal.  

2. Existing financing documents

The potential changes to the legal landscape that may occur as a result of Brexit (or any regulatory changes that would be necessary in the event the UK decides to leave the EU) mean that borrowers and lenders should carefully consider the terms of their loan documentation. Brown Rudnick has been advising on the impact of Brexit on the following provisions:

A. Material adverse change - The wording of these clauses should be examined in order to determine whether the lender may have a right to call an event of default under the MAC clause as a result of Brexit.   Borrowers should note that post-2007 crisis practice showed that although MAC clauses have been included in most facility agreements they were rarely successfully triggered by the lenders.  While the general consensus is that Brexit should not constitute a MAC event of default under a facility agreement based on the Loan Market Association form, UK borrowers whose business is particularly reliant on access to EU markets may wish to consider this provision in further detail in light of Brexit.
B. Increased costs - Most facility agreements include an increased costs clause that allows a lender to pass on to the borrower any increased capital costs as a result of changes in law or regulation. If Brexit were to cause lenders to incur greater costs of capital it is possible that this cost be passed on to borrowers.

C. Illegality - Under the LMA-form facility agreement, if it becomes illegal for a lender to perform its obligations or to fund or maintain its participation in a loan then the borrower may be required to repay the loan early.  Depending on particular wording in the facility documentation, there is a possibility that such a prepayment event may be triggered by Brexit, for example as a result of a lender losing its 'single passport' rights under the MiFID Directive (MiFID allows a bank or financial institution in one Member State the ability to carry on business across other Member States without having to obtain licenses or permits in each individual EU country. In the event of Brexit, UK-based banks or financial institutions that do not have a presence in an EU Member State would have to consider whether to establish EU branches in order to take advantage of MiFID to access the single market). Such mandatory prepayment, although not triggered by a 'fault' of the borrower, may trigger prepayment /makewhole fees in the finance documentation has not been negotiated as sufficiently borrower-friendly.

D. Events of default - Although Brexit itself may not cause an event of default to occur under standard LMA-form facility agreement, it is worth reviewing transaction documents to ensure that no default provisions are triggered for example, by a technical mis-representation (e.g., the COMI representation) as a result of Brexit.   

E. Governing law and jurisdiction - The majority of UK financing documents include a specific governing law provision as well as a submission to jurisdiction clause. UK and EU courts are likely to continue to give effect to the parties' express choice of law under their contracts. As a result, the impact of Brexit on the governing law of contracts of or jurisdiction is unlikely to be greatly impacted in the event of Brexit.  However, certain implementation or enforcement issues may still arise.

F. Enforceability - Although, we do not expect Brexit to have any significant effect on the rights and obligations of the parties under facility documentation that is expressed to be governed by English law as English contract law stands largely independent of EU law, certain enforcement issues may arise depending on the nature of the transaction and location of the assets/borrowing entity.

G. Currency - As the UK has its own currency and the vast majority of facility agreements specify the currency of payment, Brexit is unlikely to have any material impact in relation to the currency provisions of facility documentation, but relevant payment provisions should be reviewed to avoid any technical defaults.

Please note that the above commentary is of a general nature and the exact terms of your transaction documentation should be reviewed in detail.

About Brown Rudnick

BROWN RUDNICK LLP, an international law firm with offices in the United States and Europe, represents clients from around the world in high-stakes litigation, international arbitration and complex business transactions. Clients include public and private corporations, multinational Fortune 100 businesses and start-up enterprises. The Firm also represents investors, as well as official and ad hoc creditors’ committees in today’s largest corporate restructurings, both domestically and abroad. Founded more than 60 years ago, Brown Rudnick has over 230 lawyers providing advice and services across key areas of the law. Beyond the United States, the Firm regularly serves clients in Europe, the Middle East, North Africa, the Caribbean and Latin America. With its Brown Rudnick Center for the Public Interest, the Firm has created an innovative model combining its pro bono, charitable giving and community volunteer efforts.


Elena Rey

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