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Draft Guidelines for intercreditor agreements in UK commercial real estate finance transactions – 2013 Commercial Real Estate Finance Council Europe®

Market ConsultationIssued on 14 November 2012 Responses due by 20 January 2013

COMMERCIAL REAL ESTATE FINANCE COUNCIL EUROPE DRAFT INTERCREDITOR GUIDELINES

CONTENTS

1. INTRODUCTION

2. KEY STRUCTURAL ASSUMPTIONS 2.1 Facility Agreements 2.2 Downstreaming of proceeds of mezzanine funding 2.3 Mezzanine hedging 2.4 Subordinated Loans 2.5 Security structure 2.6 Structure diagram

3. KEY TERMS TO BE INCLUDED IN THE INTERCREDITOR AGREEMENT Parties Ranking and priority of Debt Limited Senior HeadroomAdditional Senior Debt and Excess Senior Debt Property Protection Loans Anti-layering Amendments and waivers by Senior Creditors by Mezzanine/Junior Creditors by Subordinated Creditors Payment Stop Notice Order of application of proceeds prior to the occurrence of a [Senior Default] After the occurrence of a [Senior Default] Shared Security Mezzanine Security Mezzanine cure rights Option to purchase the Senior Loan Valuations Restrictions on enforcement Permitted Mezzanine Enforcement Action Grace period Release of Mezzanine and Subordinated liabilities Cross default provisions Representations Consultation Transferability Governing law

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1. INTRODUCTION

1.1 The Commercial Real Estate Finance Council (Europe) (CREFC) established the Intercreditor Working Group in order to encourage principals, service providers and advisers in the European commercial real estate industry to promote greater consistency in and understanding of intercreditor issues which arise in the context of commercial real estate finance transactions. CREFC believes that by promoting a common set of widely understood principles, participants in the industry will be better equipped to work on transaction structures where often-encountered issues merit a similar approach. The Intercreditor Working Group recognises that there is no “one size fits all” solution to all issues, and that many matters will remain open to negotiation and to tailoring to the needs and requirements of any particular transaction. This paper does not seek to impose a “base case” opening position on matters commonly negotiated between transaction parties. Rather, it seeks to promote a common approach to the issues where this can be achieved.

1.2 The guidelines set out in this paper are intended to be applicable to lending transactions which are funded directly by lenders (with no intention to subsequently securitise) and to those which are (or are intended to be) funded, in whole or in part, through the CMBS markets. The publication of these guidelines has two key aims: first, to promote consideration of a common set of issues in all intercreditor agreements going forward, addressing issues which have proved to be troublesome during the experience of the last few years; and, second, to encourage market participants to have confidence that an acceptable compromise between the different and frequently conflicting interests of different creditors can be achievable. Each of these aims seeks to promote a more active market in real estate finance and investment.

1.3 This paper, in its current version, is being published for consultation amongst market participants generally. Those active in the commercial real estate industry (in whatever capacity) are encouraged to submit comments on the draft guidelines – whether those comments be conceptual, structural or detail in nature. All comments received will be carefully considered by the Intercreditor Working Group and will be taken into account in publishing the completed version of these guidelines in the first quarter of 2013.

1.4 This paper accordingly sets out the key terms and principles to be considered for inclusion in an intercreditor agreement governing the relationship between the creditors in respect of, among others, a senior facility (the Senior Facility) and a mezzanine facility (the Mezzanine Facility) (the Intercreditor Agreement), each to be made available in respect of the same asset(s).

1.5 This paper has been prepared using a UK real estate financing as its paradigm. It assumes that the relevant obligors will be English-incorporated (or established) entities. It contains a set of guidelines to be considered – not a standard model. It touches on many areas where detailed tax and legal advice will be required. In particular, appropriate additional legal and tax considerations will apply for real estate and/or entities in other jurisdictions.

1.6 This paper does not cater for an A/B loan structure under which a single loan made to a single borrower is split behind the scenes (without any involvement of the borrower), at some point on or after origination, into senior and junior loan interests. It is felt that this type of loan structure will not typically find market favour in the current economic environment. However, the principles set out in this paper would not preclude either a senior or a mezzanine loan being further split (into, e.g., senior A and senior B, as applicable), nor are the suggested solutions unique to structurally subordinated mezzanine finance.

1.7 If there are to be, for example, transparent senior A and senior B loans, or mezzanine A and mezzanine B loans, within a structure from the outset then the guidance and principles in this paper will need to be adapted accordingly.


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2. KEY STRUCTURAL ASSUMPTIONS

2.1 Facility Agreements: This paper is prepared on the assumption that there will be a separate underlying loan agreement for each of the Senior Facility (the Senior Facility Agreement) and the Mezzanine Facility (the Mezzanine Facility Agreement)1. The borrower under the Senior Facility is referred to as the Senior Borrower (or PropCo), and the borrower under the Mezzanine Facility (which is expected to be the parent of the holding company (HoldCo) of the Senior Borrower) is referred to as the Mezzanine Borrower. The Senior Borrower and the Mezzanine Borrower are together referred to as the Borrowers.

2.2 Downstreaming of proceeds of mezzanine funding: This paper further assumes that the mezzanine funding will be made available to the Senior Borrower by virtue of downstream intercompany loans (a) from the Mezzanine Borrower to HoldCo (the HoldCo Loan) and (b) from HoldCo to the Senior Borrower (the PropCo Loan). The HoldCo Loan and the PropCo Loan are together referred to as the Interco Loans. Interest on the Interco Loans should be payable on a “pay if you can” basis, in order to avoid the Interco Loan claims pushing the Senior Borrower and/or Holdco into insolvency.

2.3 Mezzanine hedging: This paper includes reference to provisions relating to the position of a Mezzanine Hedge Counterparty although it is not common, in practice, to put a swap in place for the Mezzanine Facility. More likely, the Mezzanine Borrower will be required to purchase a cap or take a fixed rate loan, with the Mezzanine Lender hedging itself (if required) and in such circumstances the Mezzanine Lender would expect to benefit from an indemnity in respect of hedge break costs (usually set out in the Mezzanine Facility itself).

2.4 Subordinated Loans: In addition, there will most likely be sponsor/shareholder debt lent into one or more of the Borrowers and/or security providers (together, Obligors). These loans should be fully subordinated to the Senior Loan, the Interco Loans and the Mezzanine Loan. Consideration should be given as to whether or not these loans (Subordinated Loans) should be secured or unsecured (and, if they are secured, the relevant creditors should be party to the Intercreditor Agreement and the Subordinated Loans should be catered for at the bottom of the cashflow waterfalls in the Intercreditor Agreement). If they are unsecured, more common practice would be for the creditors to enter into subordination agreements with the Agents, fully subordinating the claims of those creditors in respect of the Subordinated Loans (Subordination Agreements). Consideration should also be given as to whether Subordinated Loans should be lent down through each entity in the chain (following the downstreaming model for the Mezzanine Debt).

2.5 Security structure: This paper further assumes that a common security package (in the form of registered mortgages and full fixed and floating charges over all their assets) will be granted by each of the Senior Borrower and HoldCo in favour of a security trustee (the Security Trustee), who will hold the security granted to it on trust for (a) the finance parties under the Senior Facility (the Senior Creditors) and (b) the finance parties under the Mezzanine Facility (the Mezzanine Creditors) (together, the Shared Security), in each case to be held and applied according to the ranking and waterfall provisions of the Intercreditor Agreement. Additionally, the Mezzanine Creditors will benefit from first-ranking share pledges over the shares in the Mezzanine Borrower and HoldCo and assignments over the receivables under any Subordinated Loans (including the HoldCo Loan) granted by either of them (the Mezzanine Security). The Shared Security is, as its name would suggest, shared between the Senior Creditors and the Mezzanine Creditors, whereas the Mezzanine Security is granted for the benefit only of the Mezzanine Creditors. However, the enforceability of the Mezzanine Security will be subject to restrictions as set out in the Intercreditor Agreement and further described below.

2.6 Structure diagram: Annexed to this paper is a structure chart illustrating this assumed transaction structure.

1 It is not necessarily the case that each loan agreement will be based on the same form, although some sponsors may push for this to ensure consistency of definitions, particularly for common financial covenants (or inputs for such covenants).


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3. KEY TERMS TO BE INCLUDED IN THE INTERCREDITOR AGREEMENT

Parties The parties to the Intercreditor Agreement should be:

(a) the facility agent under the Senior Facility (the Senior Agent);

(b) the security trustee in respect of the Shared Security (the Security Trustee) (likely to be the same entity as the Senior Agent);

(c) the lenders under the Senior Facility (the Senior Lenders);

(d) the senior hedge counterparty (if any) (the Senior Hedge Counterparty);

(e) the facility agent/security trustee under the Mezzanine Facility (the Mezzanine Agent);

(f) the lenders under the Mezzanine Facility (the Mezzanine Lenders);

(g) the junior hedge counterparty (if any) (the Junior Hedge Counterparty);

(h) HoldCo (as creditor under the PropCo Loan);

(i) the Mezzanine Borrower (as creditor under the HoldCo Loan); and

(j) the Senior Borrower and any guarantors of the Senior Facility (together with the Senior Borrowers, the Senior Obligors)2.

As noted above, if the sponsor (or any of its affiliates or subsidiaries) (a Subordinated Creditor) provides a Subordinated Loan to a Borrower or any other Obligor or has other direct claims against any of them, then the sponsor (or such affiliate or subsidiary) should either (i) become party to the Intercreditor Agreement for the purpose subordinating its claims and rights to those of the Senior Creditors and the Mezzanine Creditors or (ii) enter into separate Subordination Agreements. Where the Obligors are party to the Intercreditor Agreement, it should contain provisions making it clear that where the Intercreditor Agreement and the facility documents conflict, the provisions of the Intercreditor Agreement prevail.

Ranking andpriority of Debt: The Intercreditor Agreement should include a clear statement of the ranking of

the liabilities which are to be subject to its terms, as follows:

First, pro rata: the debt under the Senior Facility [and liabilities in respect of the Senior Hedging] (together, including any Additional Senior Debt, the Senior Debt];

Second, pro rata: the debt under the Interco Loans (the Interco Debt), and under the Mezzanine Facility3 and liabilities in respect of the Mezzanine Hedging

2 The Obligors will most likely be party to this form of Intercreditor Agreement. In particular, the sponsor group companies which are creditors under the Interco Debt require to be party to ensure effective subordination of the interco/mezzanine claims.

3 In practice, the Interco Debt and the Mezzanine Debt represent, together, the overall mezzanine debt position (albeit at different levels).


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(if applicable4) (together, the Mezzanine Debt);

Third, any Excess Senior Debt (as described below); and

[Fourth, any debt under the Subordinated Loans (the Subordinated Debt).5]

The precise ranking of all claims is a matter for commercial negotiation between the transaction parties. In addition, it should be specifically made clear in the drafting of the “ranking statement” that this is subject to the more detailed provisions of any later cashflow waterfalls (which may, for example, permit payment of mezzanine/interco interest prior to senior principal prior to the occurrence of a default).

Limited Senior Headroom: There should be only a limited “senior headroom” concept, to allow recovery by the relevant Senior Lenders of certain additional amounts ahead of the Mezzanine claims (Additional Senior Debt).

- Additional Senior Debt and Excess Senior Debt Additional Senior Debt will typically comprise:

(a) the amount of any Property Protection Loans (as described below) made by one or more Senior Lenders [up to a cap of £•]; and

(b) capitalised interest, including default interest.

Exactly what will be comprised in Additional Senior Debt, and the level of any caps, will remain a matter for commercial negotiation. Any liabilities of the Obligors to the Senior Creditors in excess of the permitted Additional Senior Debt will rank behind the Mezzanine Debt as Excess Senior Debt.

- Property Protection Loans The Senior Facility may allow the Senior Lender the ability to pay (a) certain property-related expenses (such as headlease rents, insurance, utilities, property management and other costs) and (b) certain lender-incurred expenses (such as running costs if the Senior Loan has been securitised) and in each case to recover these from the Obligors as part of the Senior Debt. Any amounts so paid may be recovered as indemnity payments or may specifically be structured as loans (Property Protection Loans) to the Senior Borrower.6 The definition of Property Protection Loans (and other amounts recoverable as Additional Senior Debt) should thus be drafted taking into account those permitted or envisaged under the Senior Facility.

Anti-layering: No additional financial indebtedness is to be permitted between the Senior Facility and the Mezzanine Facility.

Amendments and waivers:

- by Senior Creditors The Senior Creditors will not be permitted to agree to amend or waive certain material provisions of the senior finance documents (the Senior Finance Documents) to which they are party without the prior consent of the Mezzanine Agent (acting on the instructions of all Mezzanine Lenders or (with respect to

4 This should be included only if the Subordinated Lenders are party to the Intercreditor Agreement.5 Consider whether the Mezzanine Creditors should be given the option to fund these amounts first. If so funded, they would form part of

the Mezzanine Debt and should not rank ahead of the Senior Debt.6 •


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certain amendments) a majority of • % of the Mezzanine Lenders (the Majority Mezzanine Lenders)).

The material provisions are provisions which would result in or which relate to:

(a) any change in the date of payment of any amount;

(b) an increase in the interest rate or margin or in any fee or other amounts payable or the inclusion of any additional amount payable (whether as margin, fee or otherwise, and whether or not contingent on the occurrence of any event);

(c) any change in the basis on which any payment is calculated, if the effect of such change would be to increase any amount payable under the relevant Senior Finance Document(s);

(d) an increase in or extension of commitments or in the principal amount of the Senior Facility, or an extension of the categories of other amounts which may constitute Senior Debt (for example, additional categories of Property Protection Loans);

(e) any change in the term of the Senior Facility [(except an extension for a period not exceeding • month(s))];

(f) any change to the [material] hedging covenants or arrangements set out in the Senior Facility or related hedging strategy letter;

(g) any changes to the [material] [financial] terms of the Senior Hedging agreement;

(h) any change to a financial covenant to make it more onerous (including by changing any relevant definition) or the addition of any new financial covenant;

(i) any change to any cashflow triggers, cash-trap or cash-sweep provisions in the Senior Finance Documents (unless the effect of the relevant change would be to release additional funds available to be distributed to Mezzanine Creditors);

(j) any change to the rules of the Senior Finance Documents relating to the Senior Lenders’ decisions or the definition of “Majority Lenders”;7

(k) a release of an Obligor other than in accordance with the terms of the Senior Finance Documents and/or the Intercreditor Agreement;

(l) a release of security other than in accordance with the terms of the Senior Finance Documents and/or the Intercreditor Agreement, unless either an event of default (however described) under the Senior Facility Agreement (a Senior Default) is outstanding or, in relation to a disposal of any of the properties, if the aggregate disposal proceeds

7 This may be extended to include reference to Senior Hedge Counterparties. The transaction parties will have to determine how weighted voting will work taking into account hedge mark-to-market values. The market generally does not utilise this concept, but it remains a possibility.


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together with any equity contribution and/or Subordinated Loan made in connection with such disposal are not less than the aggregate of the applicable release amount under the Senior Facility Agreement and the applicable release amount under the Mezzanine Facility Agreement;

(m) a change to the definition of any, or the addition of any new, actual or potential Senior Default [where the effect of the change would be to make the Senior Defaults more likely to occur8]; and

(n) any change to the right of a Senior Lender to assign or transfer.

Any consent required from a Mezzanine Lender will be deemed to be given if the relevant Mezzanine Lender has not responded (either to consent or to refuse consent) within • business days of written request.

Where the Senior Creditors are not restricted from making changes, then the Mezzanine Creditors will be bound by any decision taken by the requisite majority of Senior Creditors (which will be the instructing group for these purposes).

The parties should consider whether or not the ability of the Mezzanine Lenders/Creditors to block certain amendments should continue to apply if the Mezzanine Debt is wholly under water.

- by Mezzanine/Junior Creditors Prior to the date on which all liabilities under the Senior Facility and Senior

Hedging have been paid in full (the Senior Discharge Date), the Mezzanine Lenders and the Interco Lender(s) will not be permitted to agree to amend or waive certain material provisions of the mezzanine finance documents (the Mezzanine Finance Documents) or the Interco finance documents (the Interco Finance Documents and, together with the Mezzanine Finance Documents, the Junior Finance Documents), as applicable, without the prior consent of the Senior Agent (acting on the instructions of all or (with respect to certain amendments) a majority of • % of the Senior Lenders9 (the Majority Senior Lenders)).

The material provisions are provisions which would result in or which relate to:10

(a) an increase in the interest rate or margin or in any fee or other amounts payable or the inclusion of any additional amount payable (whether as margin, fee or otherwise, and whether or not contingent on the occurrence of any event);

(b) any increase of commitments under the Mezzanine Facility or the facilities with respect to the Interco Loan (the Interco Facilities) except in certain permitted circumstances as set out below;

(c) any decrease in the term of the Mezzanine Facility;

8 If the borrower negotiated a less onerous event of default under the Senior Facility, the Mezzanine Lenders should not object.9 It is thought that this should remain a decision for Senior Lenders alone, although it is possible that Senior Hedge Counterparties may

wish to have a say for particular matters. If this is the case, consideration will have to be given as to how the voting mechanics should work taking into account the issues which may arise from this. See the previous footnote on this topic. Alternatively, (which is more common) hedge counterparties may simply seek to negotiate certain entrenched rights which require their consent to vary.

10 [ ].


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(d) a release of an Obligor (other than a Mezzanine-only Obligor) other than in accordance with the terms of the Junior Finance Documents;

(e) a release of security other than (i) Mezzanine-only security or (ii) otherwise in accordance with the terms of the Junior Finance Documents;

(f) a change to the definition of any actual or potential Event of Default (however described) under the Mezzanine Finance Documents[ where the effect of the change would be to make the [Mezzanine Defaults] more easily tripped11]; and

(g) any change to the right of a Mezzanine Lender to assign or transfer.

The “permitted circumstances” referred to in paragraph (b) above are as follows: at any time prior to taking any permitted mezzanine enforcement action, the Mezzanine Lenders may increase the principal amount of the Mezzanine Facility by any amount agreed with the Mezzanine Borrower at that time so long as the following conditions are met:

(i) the increase is made for the purposes of making a Property Protection Loan, a cure payment, or remedying a Senior Default, in accordance with the provisions of the Intercreditor Agreement;

(ii) the additional principal amount does not become due and payable (other than pursuant to any permitted mezzanine enforcement action) earlier than • months after the Senior Discharge Date;

(iii) the increase of principal could not reasonably be expected to result in the insolvency of any Obligor; and

(iv) to the extent that such principal increase bears any interest or accrues fees/commission at a rate in excess of the prevailing interest, or fees/commission in relation to the existing Mezzanine Facility, then prior to the Senior Discharge Date, such excess will only be due and payable by the relevant Obligor (A) to the extent of amounts which would otherwise be paid into its general account and provided no payment stop notice is outstanding with respect to the Interco Loans and (B) if the Senior Creditors have not taken any Enforcement Action.

- by Subordinated Creditors Prior to the earlier of the Senior Discharge Date and the date on which all liabilities under the Mezzanine Facility have been paid in full, the Subordinated Creditors will not be permitted to amend or waive the terms of, or give any consent under, any documents pursuant to which the Subordinated Loans are constituted without the prior consent of the Majority Senior Lenders and the Majority Mezzanine Lenders [where do to so would materially and adversely affect the interests of the Senior Lenders and/or the Mezzanine Lenders].12

Payment Stop Notice: Prior to the Senior Discharge Date and the occurrence of a [Material] Senior Default, interest and principal payments under the PropCo Loan, the HoldCo Loan, the Mezzanine Facility and the Subordinated Loans (together with any other upstream distribution of whatever nature, Upstream Payments) are to be

11 If the borrower negotiated a less onerous event of default under the Mezzanine Facility, the Senior Lenders should not object.12 The parties should consider whether or not this carve-out should apply. For example, the sponsor may wish to capitalise outstanding

debt or undertake other intra-group reorganisations which may involve amending the sponsor debt arrangements.


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applied in accordance with the relevant Mezzanine/Interco Finance Documents.

If, following the occurrence and continuance of a [Material] Senior Default, the Senior Agent issues a payment stop notice to the Senior Borrower, HoldCo, the Mezzanine Borrower and the Mezzanine Agent (a Payment Stop Notice), no Upstream Payments are permitted until the first to occur of: (a) an Excess Cash Release Event (as defined below); (b) cancellation of the relevant Payment Stop Notice by the Senior Agent; and (c) the Senior Discharge Date. In these circumstances funds may thereafter to be applied in accordance with the pre-default waterfall.

Material Senior Default means:

(i) an insolvency event of default under the Senior Facility Agreement [(relating to actual, rather than potential, insolvency events)] relating to any Obligor or Subordinated Creditor;

(ii) an actual or potential non-payment event of default (including a prospective non-payment which the Senior Agent reasonably believes will occur on the next payment date) under the Senior Facility Agreement;

(iii) the breach of any financial covenant which is not cured in accordance with the terms of the Senior Facility Agreement; or

(iv) the commencement of Enforcement Action (as defined below) by any Senior Creditor,

and, for the purposes of paragraphs (i), (ii) and (iii), regardless of whether any standstill or extension has been agreed by the Senior Agent and the Senior Borrower.

it is a matter for negotiation what Senior Defaults will result in the ability to serve a Payment Stop Notice. This concept may apply to all Senior Defaults, not just a more restricted list. In addition, the parties should consider the payment stop provisions in light of the accounts and payments provisions in the Senior Finance Documents – the two concepts should dovetail.

Enforcement Action means action to:

(a) demand payment of any Debt (but only to the extent that the demand is not satisfied);

(b) declare any Debt prematurely due and payable;

(c) enforce any Debt by way of attachment, set-off, execution or otherwise;

(d) exercise any right to require an Obligor [or a Subordinated Creditor] to acquire any Debt;

(e) close out or terminate any senior hedging arrangements, unless specifically permitted under the Senior Finance Documents;

(f) enforce, or require the Senior Agent or Mezzanine Agent (as applicable) to enforce, any security by sale, possession, appointment of a receiver


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or administrator or otherwise;

(g) initiate or take any procedure or step or support the taking of any procedure or step, or give any notice, in relation to:

(i) insolvency, winding-up or appointment of a liquidator, reorganisation, administration, or appointment of an administrator, or dissolution proceedings;

(ii) any voluntary arrangement, scheme of arrangement, composition or assignment for the benefit of creditors; or

(iii) any analogous proceedings, whether relating to a natural or legal person or entity (whether or not having corporate personality),

in respect of any Obligor, whether by petition, convening a meeting, voting for a resolution, or otherwise;

(h) bring or support any legal proceedings against an Obligor in relation to any matter which would have a material adverse effect upon an Obligor’s ability to meet its payment obligations under the finance documents;

(i) take any other step, or exercise any right, in relation to the recovery of the Debt or any part of it; and/or

(j) take any other step, or exercise any right, as provided for under the Senior Finance Documents in relation to actions permitted in case of an event of default.

Excess Cash Release Event means, following the service of a payment stop notice, the occurrence of • consecutive payment dates on which no [Material] Senior Default remains outstanding.

An Obligor may only make a payment in respect of the Subordinated Debt then due if such payment is not restricted by the Senior Facility Agreement and/or the Mezzanine Facility Agreement or the Majority Senior Lenders and/or the Majority Mezzanine Lenders (as the case may be) consent to such payment.

Order of application of proceeds: The provisions relating to the order of application of proceeds should clearly

state if and, if so, the extent to which they are intended to override any “partial payment” provisions in the underlying facility agreements.

- prior to the occurrence of a [Senior Default]: Prior to the occurrence of a Senior Default or the service of a Payment Stop

Notice13, available funds are to be applied in the following order of priority14:

(a) in or towards payment pro rata of (i) all fees, costs and expenses of

13 The parties should clearly state when the waterfalls are to be switched. This will typically be on the occurrence of a Senior Default but subject to the Payment Stop Notice and cure provisions set out elsewhere in the Intercreditor Agreement.

14 The base case is that all payments (except Excess Senior Debt) to be made to the Senior Creditors in respect of funds derived from the Senior Obligors/the Shared Security should be paid in priority to payments in respect of Mezzanine/Junior Debt where a departure from this is required (for example, to distinguish between scheduled and non-scheduled amortization), this may be specifically negotiated.


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the Senior Agent [and (ii) all fees, costs and expenses of any servicer appointed by the Senior Agent and/or a Senior Lender15];

(b) in or towards payment pro rata of (i) any periodic payments (not being payments as a result of termination or closing out) due and payable to the Senior Hedge Counterparty and (ii) any accrued interest, fees and other amounts (other than principal) due and payable to the Senior Lenders;

(c) in or towards payment pro rata of (i) any amounts due and payable to the Senior Hedge Counterparty as a result of termination or closing out of the Senior Hedging [(except for amounts payable under paragraph (d) below)16] and (ii) any principal due and payable to the Senior Lenders (other than Excess Senior Debt);

(d) [in or towards payment of any amounts due and payable to the Senior Hedge Counterparty arising as a result of termination or closing out of the Senior Hedging as a consequence of its becoming illegal for the Senior Hedge Counterparty to comply with its obligations or the occurrence of any event of default or additional termination event relating to the Senior Hedge Counterparty;17]

(e) in or towards payment of all fees, costs and expenses of the Mezzanine Agent;

(f) in or towards payment to [the Mezzanine Borrower as creditor in respect of the HoldCo Loan in an amount equal to the aggregate of] (i) any periodic payments (not being payments as a result of termination or closing out) due and payable to the Mezzanine Hedge Counterparty and (ii) any accrued interest, fees and other amounts (other than principal) due and payable to the Mezzanine Lenders;

(g) [if any Excess Senior Debt can arise pre-default, in or towards payment of any Excess Senior Debt then due and payable to the Senior Lenders]; and

(h) in or towards payment of the surplus (if any) to the Obligors.

- After the occurrence of a [Senior Default]:

- Shared Security After the occurrence of a Senior Default (but subject to the provisions set out in “Payment Stop Notice” above and subject to any permitted cure being effected), all amounts recovered by or on behalf of the Senior Creditors (including proceeds of enforcement of the Shared Security) shall be applied in the following order of priority18:

15 Include if the Senior Facility envisages CMBS transactions and the engagement of a servicer/special servicer whose fees and costs are to be indemnified by the Senior Borrower on a loan default.

16 The subordination of certain close-out amounts payable to a hedge counterparty (the so-called “flip clause”) is typically only found in capital markets transactions.

17 See prior footnote.18 The precise order of priorities is a matter for negotiation. As between Senior Creditors, the hedge may be senior or, more commonly,

pari passu. If the Subordinated Creditors are party to the intercreditor agreement then they should be catered for in the waterfall also. Note also that subordination of certain payments to hedge counterparties arising as a result of a default or event affecting them may not be appropriate for transactions where a capital markets financing is not expected.


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(a) in or towards payment pro rata of [(i)] all fees, costs and expenses of the Senior Agent [and (ii) all fees, costs and expenses of any servicer or special servicer appointed by the Senior Agent and/or a Senior Lender 19];

(b) in or towards payment pro rata of (i) any periodic payments (not being payments as a result of termination or closing out) due and payable to the Senior Hedge Counterparty and (ii) any accrued interest, fees and other amounts (other than principal) due and payable to the Senior Lenders;

(c) in or towards payment pro rata of (i) any amounts due and payable to the Senior Hedge Counterparty as a result of termination or closing out of the Senior Hedging [(except for amounts payable under paragraph (d) below)20] and (ii) any principal due and payable to the Senior Lenders (other than Excess Senior Debt);

(d) in or towards payment of any amounts due and payable to the Senior Hedge Counterparty arising as a result of termination or closing out of the Senior Hedging as a consequence of its becoming illegal for the Senior Hedge Counterparty to comply with its obligations or the occurrence of any event of default or additional termination event relating to the Senior Hedge Counterparty21;

(e) in or towards payment of all fees, costs and expenses of the Mezzanine Agent;

(f) in or towards payment to [the Mezzanine Borrower as creditor in respect of the HoldCo Loan in an amount equal to the aggregate of] (i) any periodic payments (not being payments as a result of termination or closing out) due and payable to the Mezzanine Hedge Counterparty and (ii) any accrued interest, fees and other amounts (other than principal) due and payable to the Mezzanine Lenders;

(g) in or towards payment to [the Mezzanine Borrower as creditor in respect of the HoldCo Loan in an amount equal to the aggregate of] (i) any amounts due and payable to the Mezzanine Hedge Counterparty as a result of termination or closing out of the Mezzanine Hedging (except for amounts payable under paragraph (h) below) and (ii) any principal due and payable to the Mezzanine Lenders;

(h) in or towards payment to [the Mezzanine Borrower as creditor in respect of the HoldCo Loan in an amount equal to the aggregate of] any amounts due and payable to the Mezzanine Hedge Counterparty arising as a result of termination or closing out of the Mezzanine Hedging as a consequence of its becoming illegal for the Mezzanine Hedge Counterparty to comply with its obligations or the occurrence of any event of default or additional termination event relating to the Mezzanine Hedge Counterparty;

19 Include if the Senior Facility envisages CMBS transactions and the engagement of a servicer/special servicer whose fees and costs are to be indemnified by the Senior Borrower on a loan default.

20 The subordination of certain close-out amounts payable to a hedge counterparty (the so-called “flip clause”) is typically only found in capital markets transactions.

21 See prior footnote.


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(i) in or towards payment of any Excess Senior Debt payable to the Senior Creditors;

(j) in payment to any other person the Senior Agent is obliged to pay in priority to members of the Senior Borrower’s group; and

(k) the balance, if any, in payment to the Senior Borrower or HoldCo.

- Mezzanine Security Any proceeds of enforcement of the Mezzanine Security are for the benefit of the Mezzanine Creditors only. If applicable, the order of priority as between different Mezzanine Creditors and (if party to the Intercreditor Agreement) Subordinated Creditors should be specified here.

Mezzanine cure rights: Upon the occurrence of a Senior Default which is remediable (other than certain insolvency-related events of default)22, the Mezzanine Creditors will have the option to remedy that default within certain grace periods of between • business days (in relation to a payment[ or financial covenant] default) and • business days (in relation to other defaults) (each a cure period), as set out below23.

The Mezzanine Creditors must advise the Senior Agent, promptly and in any event within • business days of receipt by them of notice of default, by irrevocable notice if they intend to exercise their cure rights. If the Senior Agent is so advised, then the relevant Mezzanine Creditor(s) will be obliged to effect the relevant cure within the applicable periods as set out in the previous paragraph and, in the meantime, the Senior Agent will be required to hold in escrow any funds otherwise distributable to the Mezzanine Creditors (or to creditors ranking behind the Mezzanine Creditors).

[If the Mezzanine Creditors are taking all necessary steps to remedy the relevant default (other than a payment default) which will take longer than the relevant cure period to effect as a result of factors beyond their reasonable control, then the relevant cure period will be extended by a period of • [days/months][, except for any breach of a financial covenant, in which case the relevant cure period will be extended by a period of • business days24] .

The cure rights with respect to payment defaults and financial covenants will be for a maximum of • consecutive quarters or a total of • times during the life of the Senior Facility. There will be no limit on curing other defaults (unless and to the extent that the Senior Borrower’s cure rights are themselves limited)25.

Any cure payment made by the Mezzanine Creditors will be treated as forming part of their Mezzanine Debt and the total amount in aggregate owed by the Senior Borrower to HoldCo and by HoldCo to the Mezzanine Borrower under the relevant Interco Loans will be increased by an equivalent amount.

22 The list of relevant Senior Defaults is a matter for negotiation. It may be, for example, that only financial covenant and payment defaults will be curable by the Mezzanine Creditors.

23 This mechanism envisages that the relevant periods should start by notice, rather than the occurrence of a relevant default event. This promotes the cure mechanism as a properly timed process with a view to achieving the intention of such a mechanism (which is to afford the Mezzanine Creditors the option to cure). The precise periods will be a matter for negotiation and may vary according to the nature of the Senior Default in question.

24 This may not be required if the original cure periods are considered long enough.25 The precise numbers of permitted mezzanine cures for particular categories of default will be a matter for commercial negotiation

between the parties.


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Option to purchase the Senior Loan: At any time following the occurrence of a [Material] Senior Default which

is continuing26, the Mezzanine Lenders will have the right (exercisable for a period of up to • days from the date on which the Senior Agent first serves a copy of the notice of the relevant Senior Default on the Mezzanine Agent) on notice to purchase the Senior Debt (a Purchase Event) at par (including any capitalised interest, expenses or other amounts27) plus accrued interest, any swap breakage costs28, funding breakage costs incurred by the Senior Creditors as a result of the transfer, the reasonable costs of the Senior Lender(s) in respect of the purchase and all other amounts payable by the Obligors to the Senior Creditors (but excluding any prepayment fees and default interest).

Valuations: The parties should consider whether or not to include provisions regarding the calling of updated valuations in respect of the underlying properties in order to avoid unnecessary or duplicated costs being incurred. The matters to be covered should include (a) the timing of new valuations and (b) the costs of valuations.

Restrictions on enforcement: Prior to the Senior Discharge Date, the Mezzanine Creditors are not permitted

to take or require the Senior Agent to take (in each case, directly or indirectly) any Enforcement Action in respect of the Shared Security. They may however, in certain circumstances as described below, be permitted to take enforcement action in respect of the Mezzanine Security.29

The Interco Lenders are not permitted to take any enforcement action in respect of the Interco Loans. However, the Interco Lender(s) will be required to take such enforcement action as the Senior Agent may direct or otherwise require.

Permitted Mezzanine Enforcement Action: Following the occurrence of an event of default under the Mezzanine Facility

Agreement or the commencement of Enforcement Action by the Senior Creditors, the Mezzanine Agent (acting on the instructions of the Majority Mezzanine Lenders) may, after giving • business days’ notice to the Senior Agent, enforce the Mezzanine Security and dispose (or concur in the disposal) of the shares in the Mezzanine Borrower and/or HoldCo and the receivables under the relevant Interco Loans and/or Subordinated Loans to a third party (an Acquisition Party, and any such acquisition an Acquisition). Where the Acquisition Party is a Permitted Acquirer and wishes to take advantage of the provisions applicable to Permitted Acquirers this will be subject to compliance with the conditions set out below.30

A Permitted Acquirer is any one of: (a) an original Mezzanine Lender; (b) an entity nominated by an original Mezzanine Lender which is wholly owned and/or directly or indirectly controlled by the Mezzanine Lender (or advised by

26 A “Purchase Event” may also include any amendment by the Senior Facility which extends the term of the Senior Loan. The precise scope of Purchase Events will be a matter for negotiation between the parties.

27 As noted above, this may include Property Protection Loans already advanced or deemed to have been advanced.28 The parties should ensure that they fully understand the terms and tenor of the hedging to ensure that they are aware of costs which

may be charged under this provision if the right to purchase is to be exercised (including whether swap liabilities may still exist at loan maturity). The Senior Creditors should therefore disclose the key terms of applicable hedging and the Mezzanine Creditors should ensure that they understand how this may change.

29 The Mezzanine Lenders have no other right to take enforcement action with respect to the Shared Security (i.e. there will be no concept of permitted enforcement of the Shared Security on the instruction of Mezzanine Creditors after a standstill period).

30 The Mezzanine Lender must take into account the effect of any such Acquisition on the property management arrangements and duty of care agreements. In particular the Senior Creditors will have a veto on the identity of any new property manager.


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a fund which is the adviser to a Mezzanine Lender); or (c) any other person which becomes a Mezzanine Lender subject to the consent of the Senior Agent (acting on the instructions of [all/the Majority] Senior Lenders). A Mezzanine Lender may wish to seek pre-approval of a White List of potential Permitted Acquirers where they would not otherwise fall within the definition of that term.

The completion of the Acquisition by a Permitted Acquirer in accordance with the conditions set out in the Intercreditor Agreement should specifically override a mandatory prepayment event or a Senior Default under the Senior Facility Agreement which would otherwise occur as a result of a change of control.

A Permitted Acquirer must comply with all KYC requirements of the Senior Creditors, accede to the Intercreditor Agreement as a Subordinated Creditor (or otherwise subordinate all liabilities owed to it to the satisfaction of the Senior Agent) in respect of any liabilities owed to it by any Obligor and, upon completion of an Acquisition by a Mezzanine Lender (or by any entity owned, controlled and/or advised by it, as set out in the definition of the term ‘Permitted Acquirer’), the relevant Mezzanine Lender will cease to have certain rights under the Intercreditor Agreement, including those rights described under “Amendments and waivers”, “Mezzanine cure rights” and “Permitted Mezzanine Enforcement Action” above and will cease to benefit from the Shared Security (although they may continue to benefit from, and be bound by restrictions relating to, the Mezzanine Security).

The parties should carefully consider which rights should no longer apply: the Mezzanine Lender has effectively stepped into the shoes of the Senior Borrower’s group and should not thereafter have “additional” rights to those which the Senior Borrower has had from day one. However, the Senior Borrower’s rights to cure should remain.

If the Mezzanine Security is enforced, and the ownership of the Senior Obligors is changed to an entity other than a Permitted Acquirer, this may cause a “change of control” Senior Default. The parties should carefully consider if they would wish to suspend the operation of such a default by, for example, cash collateralising the Senior Debt pending further action.

Grace period: Following the occurrence of a Senior Default (other than a Senior Default which occurs as a result of an insolvency event in relation to the Borrower or any other [Material] Senior Obligor31), the Senior Lenders may not instruct the Senior Agent to take Enforcement Action:

(a) if, within the relevant grace period and to the extent that the Mezzanine Lenders have the right to cure, the Mezzanine Lenders make a cure payment in full to cure, or otherwise cure, such Senior Default;

(b) in respect of any Purchase Event, from the date of a purchase notice in respect of such Purchase Event until the completion of the purchase or the expiry of the purchase notice; or

(c) if enforcement action with respect to the Mezzanine Security has

31 The parties should consider whether or not it is appropriate to include all insolvency-related events of default here. It is possible to cure certain technical insolvencies by an injection of funds or capitalisation of shareholder debt. In addition, the question of what is or may be a Material Obligor is one for negotiation.


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commenced, the Mezzanine Lenders have complied with the obligations described under “Permitted Mezzanine Enforcement Action” above and the Acquisition completes by no later than • business days after receipt by the Senior Agent of notice of the intention to effect an Acquisition, provided that this restriction (c) does not apply in respect of (i) the occurrence of a Senior Default which is continuing and which is not capable of being remedied within • business days after completion of the Acquisition or (ii) any enforcement action taken by the Senior Agent or a Senior Lender if it reasonably believes the Shared Security to be in jeopardy.

Other than set out in this paragraph, “Grace period” and in “Permitted Mezzanine Enforcement Action” above, the option to purchase the Senior Facility and the right to enforce the Mezzanine Security shall not restrict the Security Agent from enforcing the Shared Security pursuant to the instructions of the [Majority] Senior Lenders.

Release of Mezzanine and Subordinated liabilities: If the Senior Agent takes Enforcement Action prior to the Senior Discharge

Date, the Senior Agent may instruct the Subordinated Creditors to take certain action, including action in order to release all or part of the Subordinated Debt and any security granted for any such liabilities.

If the Mezzanine Agent takes any Enforcement Action in relation to the first-ranking share pledge over the shares in the Mezzanine Borrower for the purposes of the Acquisition only, the Mezzanine Agent may instruct the Subordinated Creditors to take certain action in relation to the relevant Subordinated Loan, including action in order to release all or part of the liabilities under it and any security granted for any such liabilities.

The Senior Agent may release any of the security securing (and/or related claims and liabilities of any Senior Obligor evidencing) the Mezzanine Debt (other than the Mezzanine Security) Interco Loans for the purposes of the enforcement or realisation of any security in respect of the Senior Facility and the proceeds of any such enforcement or realisation must be applied in accordance with “Order of application of proceeds – Shared Security”.

In connection with any such release the documentation should include a mechanism to ensure that the Mezzanine Lender’s rights to any surplus rank ahead of any other subordinated or unsecured claims against the relevant borrower entities.

Cross default provisions: An event of default under the Senior Facility will cross-default the Mezzanine Facility but not vice versa.

Representations: Non-repeating basic representations regarding capacity, authority and authorisation will be provided by each party.

Consultation: The Senior Lenders will consult with the Mezzanine Lenders (without need for their approval) before taking any formal step to exercise any remedy against the Obligors or taking any Enforcement Action. Any such consultation period will be for a maximum of • days.

If the Senior Agent and/or Senior Lenders considers (acting reasonably) any part of the Shared Security to be in jeopardy, or is of the opinion (acting


16

reasonably) that urgent action is required in order to enforce the Shared Security, no such consultation will be required. In these circumstances the Senior Agent will advise the Mezzanine Lenders of the relevant action taken and the reasons therefor.

Transferability: Subject to the terms of the Senior Finance Documents or the Mezzanine Finance Documents, as applicable, the Senior Lenders and Mezzanine Lenders may freely transfer or assign their interests in the relevant Debt and the Senior Finance Documents or Mezzanine Finance Documents, respectively, to any person provided that:

(a) the transferee accedes to the Intercreditor Agreement; and

(b) the assignment or transfer to that person will not, as at the date of that assignment or transfer, result in any deduction or withholding for or on account of tax being required by law to be made from a payment under the Senior Finance Documents or Mezzanine Finance Documents.

Notwithstanding the above, neither the Senior Lenders nor the Mezzanine Lenders may transfer their respective interests to a Borrower or any affiliate of a Borrower without the consent of the other [Finance Parties/Lenders].

Governing law: English.


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Mezzanine Security comprises:

(a) share pledges over HoldCo and Mezzanine Borrower;

(b) security over HoldCo Loan; and

(c) floating charge over all assets of TopCo and Mezzanine Borrower.

Shared Security comprises:

(a) registered mortgages;

(b) share pledge over Senior Borrower;

(c) security over rental account and other bank accounts

(d) security over PropCo Loan; and

(e) floating charges over all assets of HoldCo and Senior Borrower.

SPONSORS

TopCo

Mezzanine Lenders

Mezz Hedge Counterparty

Security Trustee

Mezz Agent

Senior Lenders

Senior Hedge Counterparty

Senior Agent

Mezzanine Borrower

HoldCo

Senior Borrower(PropCo)

Properties

HoldCo Loan

Mezzanine Loan

Mezzanine Security

Senior Loan

Mezzanine Hedge

Senior Hedge

Shared SecurityBenefit of

transaction Security

100%

100%

100%PropCo Loan