Recourse and subrogation claims in the context of Dutch commercial real estate financings. Food for lawyers or something a lender should also care about?
05 september 2022
When providing a secured loan a lender may take security from parties other than its borrower to limit its credit risk, for example, from an affiliate of or investor in the borrower. Such third-party security could take the form of a guarantee, surety or declaration of joint and several liability or a third-party could provide a mortgage or pledge over an asset belonging to it to secure the debt of the borrower. If a third-party security provider partially or fully discharges a borrower's debt to the lender, whether by payment or through enforcement by the lender of its third-party security, the third-party security provider will, by operation of law, immediately obtain a right to claim the amount discharged by it back from the borrower based on recourse (regres) and subrogation (subrogatie).
These rights of recourse are not very desirable for a lender if the borrower still owes the lender money as well. Claims made against its borrower by a third-party security provider will compete with the lender’s own claims, could push the lender's loan into default and could interfere with a lender’s own strategy in a loan default scenario. In a worst case scenario, a third-party security provider may push a borrower into bankruptcy or creditor scheme of arrangement proceedings, which could seriously affect a lender’s potential to have further recourse against the borrower.
For these reasons and because there is, as we will see, no one size fits all solution for this issue, various provisions are usually included in loan agreements and security documents to prevent or limit risks posed to a lender by recourse and subrogation claims from third-party security providers. In this blog we will briefly discuss the difference between recourse and subrogation claims and the pros and cons of the different provisions used in practice to prevent such claims from becoming effective or mitigate their impact on the interests of a lender.
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