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| 1 minute read

The Semantic (and Substantive) Misconception in "Handing Back" the Keys

The phrase "hand back the keys" is frequently used in discussions of a borrower's options to address a distressed loan scenario, in real estate finance contexts and corporate finance matters. This misleading phrase obscures the parties' respective rights and responsibilities as, with the exception of a relatively rare seller-financing scenario, the lender never had the keys in the first place. That is to say, the lender never owned the borrower's property, and the lender generally has no obligation to do so following a borrower's default.  

"Hand over the keys" is a far more accurate phrasing. However, as my partner, Brian Cohen points out in this article, there may well be no single lender entity to which the keys may be turned over, and the lender or lenders may decline to take the keys when the borrower offers them. In that scenario, the focus becomes whether a non-recourse carve-out guaranty may be called by the lender. Although sophisticated borrowers and counsel will have worked to limit or eliminate solvency-related breaches from non-recourse triggers.  

If an NRC guaranty can't be called (or in deals without any such deep pockets to go after), the act of offering the keys to the lender can change the dynamics of the negotiation of a distressed loan, forcing the lender to cooperate with the borrower to maintain the property including by releasing cash reserves or even lending into a default to fund maintenance and ongoing operations to protect the parties' investments.        

“What’s happening is there’s an agreement between lenders and who they actually participate it out to, and that agreement is driving the decision-making process of the lender when there’s distress,” Cohen explained. “So [when you’re a borrower], you think you’re talking to the lender, but you’re not, because your lender has someone else telling them what to do.” “Sometimes your lender’s arms are tied,” he added.


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