Separateness Covenants Clause
(Pro-Lender)

Summary

This separateness covenants clause is used in a real estate financing transaction in the loan agreement and the organizational documents of the borrower entity and generally favors the lender. This clause contains practical guidance, drafting notes, and optional clauses. Generally, lenders with non-recourse mortgage loans on commercial real estate prefer to extend credit to a newly-formed special purpose entity (i.e., a limited partnership, limited liability company, or corporation) formed for the express purpose of holding real property and having no liabilities other than in the normal course of business as the owner of that property (SPE). Separateness provisions require that the SPE's assets, liabilities, corporate structure, and record-keeping are distinct from a parent company. Violation of separateness provisions typically trigger recourse under a non-recourse carve-out guaranty. As such, the borrower should carefully review these provisions and ensure that it can comply with them during the term of the loan. If the borrower's structure requires any modification to these provisions, the borrower should immediately reach out to the lender to discuss any such modifications. Generally, lenders will not agree to delete or modify covenants that negatively impact the issuance of a non-consolidation opinion. This clause contains capitalized terms that are not defined in the clause but would normally be used and defined elsewhere in the loan and/or organizational document. For a discussion of substantive consolidation, see Substantive Consolidation, and for a discussion of legal opinions in loan transactions, see Legal Opinions in an Acquisition Loan. See Borrower as a Single Purpose Entity, Acquisition Loan Agreements and Representing the Borrower in a CMBS Loan for more information on the need for separateness covenants in commercial real estate loan transactions. For a general guidance on financing commercial real estate, see Commercial Real Estate Acquisition Loan Resource Kit. For a full listing of key content covering acquisition financing, see Junior Associate Real Estate Resource Kit (Acquisition Finance).