July 2014

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Anyone involved in commercial lending transactions is familiar with provisions of loan agreements that provide for compensation to the lender in the event the indebtedness is paid in advance of the contemplated due date. These provisions are heavily litigated, particularly in bankruptcy proceedings. The title used for such provisions often reflects the arguments the respective parties will take during litigation. From the lending perspective, these provisions are usually emphasized to be “prepayment premiums” to reflect their purpose. These premiums are designed to prevent a borrower from attempting to refinance at a lower interest rate in a market where the lender will not be able to obtain the same benefit of its bargain because it will likely be re-lending the funds at the same lower interest rate. From the borrowing perspective, these provisions are usually emphasized to be “prepayment penalties,” with the borrower asserting that the payment is unreasonable or punitive in nature. (more…)