Common use of Cure Rights Clause in Contracts

Cure Rights. The ability to cure defaults under the mortgage loan is a critical element of the Intercreditor Agreement for any mezzanine lender. Mortgage lenders will not dispute that mezzanine lenders must have these rights, but the length of the cure period or the aggregate number of cure events will often be debated. It goes without saying that the longer the mezzanine lender can forestall the mortgage lender from exercising its enforcement rights under the mortgage loan documents due to the mezzanine lender exercising its cure rights, the better it is for the mezzanine lender, especially in states that allow for a streamlined or quick mortgage foreclosure process. It is not uncommon to see monetary cure rights limited to as few as 3-4 over the lifetime of the loan, and multiple consecutive month cure periods as long as 3-6 months. There is no "right answer" and this point will be negotiated. The right of the mezzanine lender to purchase the senior mortgage loan in the event of default under the senior loan is a customary feature of any Intercreditor Agreement. However, what, exactly, is included in the loan purchase price and when the mezzanine lender’s rights to purchase the senior loan are cut off or cease are often debated issues. For example, many senior lenders will not require default interest or late fees to be paid by a mezzanine lender who elects to purchase the senior loan, while others will want everything included. The more widely accepted practice is to not require that mezzanine lender to pay these "extras," especially, when the mezzanine lender is not affiliated in any way with the mortgage borrower. Many senior lenders will require that the purchase option cease upon the delivery of a deed in lieu of foreclosure, while others will extend the purchase option for a period of time even after the senior lender has acquired the underlying mortgage loan collateral — essentially allowing the loan purchase option to convert to a property purchase option. If the loan purchase option is converted into a property purchase option and the mezzanine lender exercises the option, the real property will be conveyed and may be subject to a real estate conveyance tax (which may not apply to a purchase of the mezzanine loan) depending on the jurisdiction. Note that many “first drafts” of Intercreditor Agreements prepared by senior lenders will not address and be silent with regard to a deed in lieu of foreclosure scenario. It is incumbent upon the mezzanine lender to add this concept to the Intercreditor Agreement to protect itself from the senior lender and mortgage borrower agreeing to a deed in lieu resolution in connection with a defaulted senior loan, which would have catastrophic consequences for the mezzanine lender. A deed in lieu provision would require the senior lender to provide prior notice to the mezzanine lender of its intention to accept the deed in lieu from the mortgage borrower and an opportunity to purchase the senior loan prior to the senior lender accepting a deed in lieu.