Default Interest, Late Fees, and Prepayment Premiums: Drafting and Enforcement

Description

Default and acceleration typically trigger various remedies and financial penalties under commercial and real estate loans. Counsel must ensure that the loan documents thoroughly spell out what constitutes a default (and what is a "continuing default") when a notice of default is required, what events of default can and cannot be cured, and the cure period concerning both monetary and non-monetary defaults.

When a loan is deemed accelerated, the lender will likely charge default interest, a make-whole or prepayment premium, and perhaps a late fee on the outstanding balance. The documents must set forth the payment obligations to which these charges apply, and the lender must follow the letter of the documents (including a separate notice of acceleration if required) or the borrower may have a legal basis to avoid these charges.

When a lender is seeking pre-petition default interest in a bankruptcy context, courts typically look to whether the amount constitutes permissible liquidated damages or an unenforceable penalty under applicable state law. The enforceability of "make-whole" premiums in bankruptcy have generally been dependent on state law contract interpretation and courts' legal determinations of whether such premiums should be characterized as liquidated damages, or more recently, as "unmatured interest" under Section 502(b)(2) of the Code. Case law continues to develop and can be very fact specific.

Listen as our authoritative panel analyzes default and acceleration provisions and default interest, prepayment, and other charges typically assessed in commercial and real estate loans. The group will also review recent bankruptcy and other case law relating to the collection of default interest, late fees, and make-whole premiums.