Commercial real estate borrowers and mortgagors formed as Delaware limited liability companies (“LLCs”) should be aware of new loan requirements after recent amendments to Delaware’s LLC Act.
The LLC Act amendment, which became effective in August 2018, allows Delaware LLCs to be divided into one or more newly formed Delaware LLCs and allocate assets and liabilities among “surviving” and “resulting” LLCs. LLC division can be problematic for lenders and other secured parties who have originated their loans based on underwriting the original LLC and its real property, principals and other assets.
As a result, before agreeing to extend a new commercial real estate loan to a Delaware LLC, lenders will likely require that an entity’s organizational documents, the loan documents, or another applicable agreement, expressly restrict the LLC’s right to divide, such as by:
- Requiring the entity’s LLC agreement to contain an express prohibition against division without prior written consent of the lender.
- Incorporating the prohibition against LLC division into various loan document representations, warranties and covenants, including the separateness covenant.
- Making LLC division of any commercial loan obligor – the borrower, guarantor, mortgagor or pledgor – without prior written consent of the lender, an event of default.
- Requiring any entities created by LLC division to assume commensurate obligations to the lender.
Similarly, when amending a loan made before the effective date of the LLC Act amendment, borrowers should expect that any prohibition of LLC division will be expressly covered in the loan amendment.
Lenders may also require borrowers under commercial real estate loans made prior to the effective date of the LLC Act amendment to certify, as part of their periodic reporting requirements, that no LLC division has occurred.