Provisions in commercial mortgage loan documents, where a particular state law is “selected” as the governing law, can drive a deal into a ditch, and take a good (or growing) lending relationship into the emergency room. In many situations, this topic is a good example of over-thinking, and perhaps over-lawyering.
- Simply stated, which of these two thinkers gets it right on using (or not using) choice of law provisions in a typical commercial mortgage loan?
The choice of law topic is a very intellectually rich subject for lawyers. Much is written about it. Entire books. It is a class topic for an entire semester in law schools. It is a wonderful topic for lawyers. It “invites” debate and discussion. And confusion.
However, lawyers who go to war over the “choice of law” provision (in commercial mortgage loan documents) are the poster child for those who argue for simplicity in contracts, and who view lawyers as deal inhibitors, and as creators of all things complicated.
My perspective is that in the typical mortgage loan, there is no legitimate reason for this provision to be the subject of discussion. There is no “choice” in choice of law. The approach should be simple -
- the mortgage loan documents should be governed by the law of the state where the project (the loan collateral) is located
Here are a few reasons supporting the two perspectives on this:
Choice of Law Should NOT be the Law of the State Where the Project is Located
- Quality Control: Mortgage lenders need to know that their loan portfolio has consistent terms (subject to the exception below). Thus, all of the loans should apply the laws of a single state.
- Easier to Manage: Using the laws of a single state makes it easier for loan servicing to make decisions.
- Exceptions (creation & enforcement): Of course, local state law must govern the creation of liens and the enforcement of remedies. So, the choice of law must always have this exception.
- He (She) Who Has the Gold Makes the Rules: The loan is the lender’s money, and if a borrower wants to use it, then the borrower simply needs to do as told – accept this approach and close the loan. The lender must be obeyed (if the borrower wants the money).
- Quality Control: In our age of technology, surely “quality” can be controlled by smarter uses of technology (for collaboration, reporting, etc). Keep a list. Share it. Also, legal opinions on choice of law provisions (that select the law of another state) can be very expensive. Let’s not lose track of this important point: the lender needs to lend money; and if the choice of law provision inhibits the deal, or increases legal fees or mucks up the closing process and experience, then the result could negatively impact the Lender’s ability to handle future loans from the borrower, or from others in the local market.
- Easier to Manage: Again, we’re well into the information age. Access to laws of the 50 states is not difficult. Collecting and sharing information about state law should not be a problem. Again, let’s not get side tracked . . . the lender needs to lend money.
- Exceptions: if and when the loan goes bad, taking the “exceptions” approach (where one state’s law governs some topics and another state’s law govern other topics) injects a level of complexity into an “already” bad situation. Dealing with a troubled loan is difficult, and now it becomes even more challenging because the lender, the borrower and then the courts must become experts at implementing the choice of law provision. Indeed, how is injecting this complexity a “good” thing? Will a court handling the case correctly apply the law (as selected under the loan documents)?
- He (She) Might Have the Gold But . . . No One Wants It: Again . . . the lender needs to lend money. Also the market understands that our system of governance allows States to have differing laws. So, “why” should a lender try to “unify” them in a lending platform? Does the market actually reward a lender for doing so?