Delaware Superior Court Says Easements and Covenants Can Cause Recourse in Non-Recourse Loans

March 6, 2020

Publication| Real Estate Services

The Delaware Superior Court recently sided with a non-recourse lender by enforcing full recourse against the guarantor of a multimillion-dollar loan after certain covenants were recorded on the mortgaged property without the lender’s consent. In Wilmington – 5190 Brandywine Parkway, LLC v. Acadia Brandywine Holdings, LLC, CA No. N17C-04-061 (Feb. 7, 2020), the Delaware Superior Court, applying New York law, held that a covenant that runs with the land is a transfer of an interest in real property and affirmed that the Delaware courts will enforce the terms of a guaranty if the loan documents provide for full recourse in the event of such a transfer without the lender’s consent.

Even something as simple as a utility easement—or, as in this case, a covenant allocating insurance proceeds in the event of a casualty at the property—is a transfer of a legal or equitable right in real property and can trigger full recourse if the terms of the loan documents are not complied with closely. In this case, the guarantor was liable for the full amount of the loan because the recording of the covenant violated one of the so-called “bad boy” carve-outs to non-recourse liability.

What does this mean for commercial borrowers and their guarantors going forward? The court’s treatment and articulation of the law in this opinion are not novel. However, given the holding in Wilmington – 5190 Brandywine Parkway, LLC and Delaware’s deference to the principle of freedom of contract, it is imperative to carefully draft, negotiate, and review the terms of recourse in a non-recourse loan before entering into the loan. There is no “one-size-fits-all” non-recourse loan, and guarantors can be on the hook for the full amount if careful attention is not paid to the recourse provisions. The opinion also demonstrates the value of carefully considering the needs of a commercial property and accounting for those needs in the loan documents as far in advance as possible. A link to the full opinion can be found below.

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