In negotiating commercial mortgage loan documentation, much time and energy is put forth by a borrower’s counsel to require the lender to act reasonably in granting or withholding required consents. Obtaining this flexibility is never more important than under CMBS loans, where the ongoing loan administration is handled by a third-party servicer rather than a relationship lender. In recent experience, perhaps due to the aftershocks of the market disruption, lenders (and servicers, as their agents) have become more inflexible in administering consent requests.
As further discussed below, New York courts have historically held that provisions that require a lender’s consent to a transfer —without any limitation on such consent—permit lenders to condition their consent upon receiving additional benefits, such as bringing a mortgage loan “up to market.” However, the case law suggests that the lenders’ consent rights have some boundaries, and even when a lender’s consent is subject to a “sole and absolute discretion” standard, New York law imposes limits on the lender’s exercise of that discretion. In particular, even where a contract affords a party the right to make a decision in its “sole and absolute discretion,” the party’s exercise of that discretion is nonetheless subject to an implied duty of good faith and fair dealing, which includes “a promise not to act arbitrarily or irrationally.”1 When a “reasonableness” requirement limits the lender’s consent right, courts have generally held that the lender may not impose conditions to bring the loan to market.
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