Stand alone second MortgageSecond mortgage Stand alone
However, if one of these borrowings goes laterally ( e.g. a defaulted debt of the borrower), the creditor will want to take into account his readiness to extend all his borrowings to that borrowing. Lenders in these circumstances profit from the fact that they have a specific terminology in their credit documentation, such as cross-default and cross-security rules.
For example, suppose a creditor grants a debtor a $1 million credit for land A and a $2 million credit to the same debtor for land and buildings. To secure the repayments of these mortgages, the creditor will receive a $1 million mortgage on the land A that will secure the debt of the debtor under the $1 million note and a $2 million mortgage on the land A that will secure the debt of the debtor under the $2 million note.
As a rule, the creditor will incorporate in the terms of each of these two mortgage loans a general cross-default provision in the following manner: "Delay on the part of the debtor under any other arrangement in favor of the creditor shall be a delay on the part of the debtor on that loan". That means that if the debtor is in arrears under the $1 million credit, it would also be in arrears under the $2 million credit, which would entitle the creditor to either a credit or both.
However, just because the credits are cross-defaulted does not mean that they are cross-collateralised. Querbesicherung considers what the mortgage will secure and how high the borrower's overall debt to the creditor is. Is the mortgage that will secure a credit, in other words, also suitable as security for another credit?
In the absence of duly developed rules on collateralisation, the response is no and the advantages of collateralisation are not realised by the creditor. Those rules are particularly important for a creditor in a context where the creditor is in a subordinated senior ranking and/or where there is a potential for the creditor's realisation of the collateral to be insufficient to repay the credit.
Well, let's come back to our example and consider that if the debtor falls behind with the $1 million credit, there will be no adequate collateral. In the event the creditor is ranked behind another creditor and/or the creditor does not anticipate that the revenue from the sale of ownership A will be sufficient to repay this credit, the creditor may assert the $2 million mortgage on ownership A on the basis of the cross-fault provision.
However, once ownership title 1 is resold under the selling authority, the lender can only use the sales revenue (subject, of course, to the prior creditor's rights) to credit the borrower's debt against the $2 million mortgage, as the mortgage indicated that it was only collateral for the mortgage.
In case the borrower wants the credits to be duly cross-collateralised, then it is necessary to include in both mortgage types special rules saying that they ensure both credits. Furthermore, the face value of both mortgage should be $3 million so that both loan can be paid back in the event of only one of the mortgage being enforced (assuming the real estate is valuable enough and is again back covered by the privileges of an older creditor).
Furthermore, adding a colloquial phrase alone and not enlarging the face value of the mortgage in our example would mean that the creditor could only use up to $2 million of the revenue to cut the debt on both credits as this was the face value of the mortgage. Whilst a borrower may choose for each of his loan (projects) to be stand-alone, a meticulously elaborated cross-default/cross-security jargon used in a joint borrowing environment will undoubtedly mitigate the risks to the creditor in a failure case.
In the absence of those conditions, the creditor may not be authorised to use the revenue from the disposal of a real estate asset to repay the Community borrower's debts on another real estate asset, and the amount of revenue available to repay those debts is restricted to the principal amount of the mortgage. Kym has broad expertise in the preparation and negotiation of credit and collateral documents for a wide range of transaction types, encompassing acquisition, commercial development/building loans, refinancing, mezzanine/subordinated financing and related financing agreements.