Borrowers are required to make various and extensive representations to lenders in real estate finance agreements. When borrowers’ representations prove false, lenders will, depending on the nature of the misrepresentation, seek to enforce remedies and in certain circumstances seek damages under so-called recourse carve-out provisions. The mortgage lender must therefore ensure that it is protected from damages stemming from a borrower’s misrepresentation by carefully defining the parameters of default provisions and recourse carve-outs relating to misrepresentations. Knowledge and materiality qualifiers will affect lender’s ability to recover such damages from a borrower.
Negotiations concerning representations in loan documents between borrowers and lenders typically focus on several areas: (i) the level of inquiry required by the borrower when investigating the truth of a particular representation, (ii) whether the representing party acted with scienter or intent to purposely deceive the lender, and (iii) the degree of damage that must be suffered by the lender as a result of a misrepresentation before the lender may be entitled to pursue remedies or damages.
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