The Loan Market Association (the LMA) published a form of duty of care agreement on 7 December 2023 for use in connection with real estate finance (REF) transactions. In this article, we briefly explore what a duty of care agreement is and how this form may be useful to lenders and borrowers in the REF market.
What is a duty of care agreement?
Where a borrower appoints a managing agent under a management agreement to manage its property on its behalf, including collecting rent, the lender is exposed to the ability and competence of the managing agent as regards its management of the property collateral.
Consequently, the lender will want to ensure it has direct contractual recourse to the managing agent to be able to recover any loss suffered as a result of poor performance by the managing agent of its management obligations. To achieve that, the lender would make it a condition of its loan to the borrower that the managing agent extend to the lender the contractual duty that it owes to the borrower.
This is documented by way of a duty of a care agreement. This document is essentially a contract between the lender, the managing agent and the borrower, under which the managing agent agrees to extend its contractual duties under the management agreement to the lender.
If no duty of care agreement is entered into, the lender would need to establish that the managing agent owes the lender a duty of care in tort in order to be able to recover loss suffered, which may be difficult.
What is the LMA duty of care agreement?
The LMA duty of care agreement is a form of duty of care agreement which has been published by the LMA for use in REF transactions in conjunction with its suite of REF documents. It has been drafted as a result of a confluence of input from banks and City law firms, but managing agents were not involved in its production. Its publication has arisen due to demand in the REF market and to promote greater efficiency in loan negotiations.
The purpose of the LMA duty of care agreement is to act as a starting point for managing agent discussions. It incorporates a number of standard provisions typically seen in duty of care agreements in REF transactions, but the LMA specifically notes that it will need to be tailored to the particular transaction at hand.
What are the key provisions?
Format & interaction with other LMA documents
To promote efficiency, the LMA duty of care agreement has been published in the form of a letter. It is designed to be used in conjunction with the LMA REF Investment Facility Agreement and cross-refers to it in a number of areas, including in relation to definitions and representations and undertakings given by the borrower. Similarly, provision is made to ensure that if there is any conflict with the management agreement, the LMA duty of care agreement prevails. Care will therefore need to be taken in ensuring the parties understand how these documents align.
Duty of care
The LMA duty of care agreement provides for the managing agent to perform its obligations under the management agreement and creates a direct contractual nexus with the security agent. In turn, this allows the security agent to bring a claim against the managing agent if it breaches the management agreement.
Rent collection
As is typical in duty of care agreements, provisions are included to ensure that the managing agent collects the rent from the property in a way that complies with the associated facility agreement. It covers the two typical scenarios found on REF transactions: first, collection by the managing agent into its own account; and second, management of the payment process to one of the borrower's accounts with the lender. Parties will need to ensure this reflects the commercial dynamics of the underlying transaction.
Termination
The security agent is authorised to terminate the management agreement and appoint a replacement managing agent if the managing agent has breached the management agreement or there is an event of default under the facility agreement. Managing agents and borrowers will need to consider how this interacts with termination provisions in the management agreement.
Professional indemnity insurance
The managing agent is required to maintain professional indemnity insurance cover. Parties will need to conduct due diligence on what that level is or should be in light of the loan size and property security value.
It is hoped that the LMA duty of care agreement will provide greater efficiency in loan negotiations on REF transactions in relation to discussions with the managing agent, and we expect to see its adoption, in part or in full, as the REF market further evolves. But as noted, it is a starting point for such discussions and it does not obviate the need for early involvement of the managing agent in loan negotiations.
If you have any questions, please do get in contact with us.
