Attention Mortgage Syndicators: What’s missing in your documents?
I’ve had an opportunity over the last year to review mortgage syndication documentation for several clients, in situations where a registrant acts as an administrator for several investors who are participants in a syndicated loan. One problematic issue I encounter during my reviews is that buried amongst Subscription Agreements and Real Estate Act Lender/Investor Disclosure Statements are one page “trust agreements” which, in my opinion, are wholly inadequate and likely wouldn’t withstand a challenge by a disgruntled investor or third party. Properly documenting a trust relationship, the indemnities that go with it and the administration of a loan from start to finish takes time and generally can’t be compressed into one or two pages. A mortgage syndicator’s relationship with an investor is fine until it isn’t and when things go sideways, the absence of carefully thought out terms and conditions could lead to costly disputes and wasted time and energy.
Here are a few examples of some common deficiencies I’ve encountered during my reviews:
- Insufficient Indemnity Language in favour of registrants/administrators - In some cases the syndication documentation completely lacks an indemnity clause, or contains an indemnity clause which doesn’t specifically indemnify the registrant’s directors, officers and employees.
- “Trust Declaration” Language - I have encountered documents which do not adequately describe the trust relationship. For example, documents often fail to specify that a registrant/administrator holds title to security documents and acquired land in trust for an investor.
- Powers and Duties of a Trustee - One of the most significant issues I have encountered is an incomplete description of what the powers and duties of the registrant/administrator are as trustee. Everything from start to finish in a loan transaction should be addressed, including foreclosure and post-foreclosure activities, and the trustee’s obligations under various scenarios.
- Buyout Rights - Documents often fail to address the rights, if any, of a registrant/administrator in the event of a disagreement between a registrant/ administrator and an investor. For example, one remedy in the event of a deadlock is that the registrant/administrator is entitled to buy out the investor for the investor’s committed investment amount plus any accrued interest, or something to that effect. Mechanisms such as this, to be used as a last resort should be considered and addressed in the documentation.
- Power of Attorney Language - There should be a section in the document that contains the necessary language to legally create a power of attorney relationship between the registrant/ administrator and investor. In the absence of this language the authority of the ‘trustee’ relationship may not be as broad as that which was intended. For example, the investor should grant the registrant/administrator the right to execute documents on its behalf, commence foreclosure proceedings at the discretion of the registrant/administrator, etc.
The risk to the registrant/administrator resulting from poorly drafted documentation can come from a few different sources, most notably from a third party such as the Alberta Securities Commission or from a disgruntled investor. I have seen cases where disgruntled, high net worth investors use their deep pockets to sue as many people involved with their investment as possible, which does nothing but tie up the time and resources of registrant/ administrators. This doesn’t have to happen! With well drafted and well thought out documentation, costly ‘misunderstandings’ can be avoided.
If you feel a review of your syndication documents is long overdue, please don’t hesitate to contact Matthew Burgoyne: firstname.lastname@example.org, 403.254.3827 or any member of our Exempt Capital Markets Group.