Prepayment Penalties Express Language Aids Enforcement


Loan agreements commonly contain provisions permitting or requiring the early repayment of all or a portion of the indebtedness under the loan agreement prior to the stated maturity date of such indebtedness. These provisions may specify that prepayments may be made at any time, at the borrower’s election, or that prepayments must be made upon the occurrence of certain events. Several courts have recently examined whether the acceleration of the maturity of indebtedness under a loan agreement, either automatically, in the event of certain events of default, or at the election of the lenders in accordance with the terms of the loan agreement, constitutes a prepayment of the loan that would give rise to the obligation of the borrower to pay a premium or penalty. This issue has been most prevalently discussed by the courts in a number of bankruptcy proceedings where lenders have been unable to recover such penalty or premium payments. While each court holding relies on the specific facts of the case being considered, recent decisions indicate that lenders which clearly specify in the operative loan documents that a prepayment penalty is due upon acceleration of the maturity of the indebtedness have a significantly better chance of having the penalty enforced than those who do not include express language to that effect.

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