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Important Considerations In Loan Payoff Agreements
Law360, New York (October 01, 2014, 11:03 AM ET) -A loan payoff agreement or payoff letter is a customary loan
transaction document requested by the borrower or borrower agent
from an incumbent administrative agent (on behalf of the lender
group) or a lender, detailing termination of such borrower’s credit
facilities. A payoff letter generally specifies the amount necessary to
repay (in full in cash, as of a date certain) the existing obligations of the
borrower(s) and the other loan parties, and the terms and conditions
upon which the incumbent administrative agent (on behalf of the
lender group) or lender agrees to terminate the loan documents and
terminate and release its security interest and lien in the collateral of
the borrower(s) and the other loan parties.
While most lawyers and bankers would agree that a payoff letter is
generally a routine matter, there are several aspects of a payoff letter
that warrant more thorough consideration.
Jason G. Beckham
1. Limit the Scope of Carveouts from “Obligations”
Every payoff letter will contain some reference to the “obligations” to be satisfied upon receipt of a
specified sum of money from the borrower(s). For example, “obligations” may take the following form:
[t]he principal balance of all loans, interest, fees, costs, expenses, the termination value and other costs
incurred in the termination of [Swap Contracts][Hedge Agreements] and all other amounts owing or
chargeable to Borrower as of the date hereof under the [Loan Documents][Credit Documents] or any
[Swap Contracts][Hedge Agreements] (the “Obligations”), but excluding any Contingent Obligations ...
It is the defined term, “contingent obligations,” that requires some additional consideration. A prudent
course of action with respect to defining “contingent obligations” would be to limit same to obligations
of the borrower(s) to lender in respect of (1) checks, drafts, cash, money instruments, items and other
remittances in payment of the obligations that are dishonored, returned or otherwise unpaid, (2) ACH
transfers, sweep accounts, cash management obligations, treasury management obligations, (3)
payments made to lender that are determined by a court of competent jurisdiction to be preferential or
otherwise avoidable under federal or state insolvency law, and (4) all other contingent indemnification
or reimbursement obligations owed by borrower to lender under the terms of the loan documents or
credit documents, which expressly, by their terms, survive termination thereof.
2. Clearly Identify the “Payoff Amount” and the Parameters of Payment Thereof
In domestic loan transactions, the “payoff amount” is typically a U.S. dollar figure that represents the
equivalent of the “obligations” as of a date certain. This “payoff amount” should include principal,
interest, fees, costs and expenses, etc. as indicated in section 1 above. One of the main concerns in
respect of the numerical calculation of the “payoff amount” (other than to generally confirm accuracy
thereof) is that the payoff letter also incorporates a “per diem,” or an amount by which the principal,
interest and fees on the loans are increased on a daily basis if such “payoff amount” is not received by a
predetermined time (typically sometime between noon and 3 p.m., local transaction time). A per diem is
a customary request and gives both the borrower and the new lender/new agent flexibility to
accommodate changes in the timing of closing any refinancing facility.
In addition to identifying the “payoff amount” as set forth immediately above, one should also confirm
(1) the time upon which the wire transfer in immediately available funds is to be received (requesting, of
course, the latest feasible time of day) by the lender, and (2) the specifics of the recipient’s bank
account (i.e. bank name, bank address, ABA/routing number, account name, account number, reference
and obligor/loan number(s)).
3. Define the Scope of Lien Release and Termination Language
The payoff letter must also clearly indicate that upon receipt of the “payoff amount” (as discussed
above), the loan or credit agreement and all other loan/credit documents and all of the lender’s
commitments to make loans to borrower(s) are terminated, and that all of the lender’s liens and
security interests in any of the collateral of the borrower(s) and the other loan parties are automatically
released, terminated and discharged.
A well-drafted payoff letter should also authorize the borrower(s), the new lender/new agent, and/or
their respective attorneys to file UCC-3 termination statements with respect to the Uniform Commercial
Code financing statements filed by the incumbent administrative agent (on behalf of the lender group)
or lender on the borrower(s) and the other loan parties. Finally, be certain to include a provision
regarding return of current collateral from the incumbent administrative agent (on behalf of the lender
group) or lender as well (i.e. stock certificates, stock powers, notes, etc.).
4. Indemnification???
Payoff letters nearly universally require the borrower(s) to indemnify the incumbent administrative
agent (on behalf of the lender group) or lender with respect to dishonored, returned or otherwise
unpaid items of payment. However, it is often contested as to whether the new lender/new agent will
further indemnify the incumbent administrative agent (on behalf of the lender group) or lender for such
dishonored, returned or otherwise unpaid items of payment.
To the extent the new lender/new agent agrees to such expanded indemnification obligations, it would
be prudent to (1) first require demand upon the borrower(s) for such amounts and nonpayment thereof
by such borrower(s), (2) incorporate a provision that subsequent written demand be made upon the
new lender/new agent, and (3) include a “sunset” provision pursuant to which new lender/new agent’s
indemnification obligations expire (i.e. typically 90 days after the date of the payoff letter).
5. Other Considerations
Timing of borrower’s request for the payoff letter (i.e. irrevocable, sufficient prior notice is
required, and anticipate scheduling issues in advance)
Confirm accuracy and consistency of defined terms in the payoff letter with existing loan
documents
Confirm borrower and all other loan parties are similarly released from existing obligations and
security interests and liens in their respective collateral is likewise automatically terminated,
discharged and released
Consider whether any existing letters of credit will need to be continued, “backstopped” and/or
cash collateralized (typically 105 percent of undrawn amount of existing letter of credit)
—By Jason G. Beckham, Sutherland Asbill & Brennan LLP
Jason Beckham is an associate in Sutherland's Atlanta office.
A version of this article originally appeared in TSL Express, published by the Commercial Finance
Association, www.cfa.com.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its
clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general
information purposes and is not intended to be and should not be taken as legal advice.
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