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Westmark Commercial Mortgage Fund IV v. Teenform Associates, L.P., et al.

Superior Court of New Jersey, Appellate Division
827 A.2d 1154, 362 N.J. Super. 336 (2003)
ELI5:

Rule of Law:

A clear and unambiguous prepayment premium clause in a commercial loan agreement between sophisticated parties is enforceable even upon the lender's acceleration of the debt following the borrower's default, provided the clause is reasonable.


Facts:

  • On July 28, 1999, Teenform Associates, L.P. executed a promissory note to Westmark Commercial Mortgage Fund IV for $3,145,000.
  • The loan was secured by mortgages on three commercial properties.
  • The note contained clauses for a six percent late charge on overdue installments and a default interest rate of an additional two percent per annum.
  • The note also included a prepayment premium clause, which explicitly stated it would be due upon any acceleration of the note.
  • This prepayment premium clause was set off in capital letters and specifically required the borrower's initials, which were provided.
  • Less than a year later, Teenform Associates fell behind on its loan payments, triggering a default.

Procedural Posture:

  • Westmark Commercial Mortgage Fund IV filed a foreclosure complaint against Teenform Associates, L.P. in the Superior Court of New Jersey, Chancery Division.
  • The trial court granted partial summary judgment to Westmark.
  • Teenform disputed the amount due, specifically challenging the late fees, default interest, prepayment premium, and attorney's fees.
  • After a hearing, the Chancery Division found the disputed amounts to be reasonable and due, and entered a Final Judgment of Foreclosure.
  • Teenform Associates, L.P. (as appellant) appealed the Final Judgment of Foreclosure to the Superior Court of New Jersey, Appellate Division.

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Issue:

In a commercial loan agreement between sophisticated parties, is a clause enforceable that requires the borrower to pay a prepayment premium even when the lender accelerates the loan's maturity date due to the borrower's default?


Opinions:

Majority - Wefing, J.A.D.

Yes. In a commercial loan agreement between sophisticated parties, a clause requiring payment of a prepayment premium upon the lender's acceleration of the debt due to default is enforceable. The court held that such clauses, like those for late fees and default interest, are presumptively reasonable in a commercial context under the standard set in MetLife v. Washington Avenue Associates. The court explicitly adopted the reasoning of the Restatement (Third) of Property, noting that it is the borrower's default that triggers the acceleration, and the lender is entitled to the benefit of its bargained-for agreement. When experienced parties freely enter into a clear contract, which included a specifically initialed waiver acknowledging the premium would be due upon acceleration, the court will not remake a better contract for the defaulting party. The court rejected prior trial court precedent to the contrary (Clinton Capital), holding that such clauses should be enforced so long as they are reasonable, and the borrower presented no evidence of unreasonableness.



Analysis:

This decision aligns New Jersey appellate law with the modern trend and the Restatement (Third) of Property regarding the enforceability of prepayment premiums upon acceleration in commercial loans. By explicitly rejecting the contrary holding of the earlier trial court case of Clinton Capital, the court provides certainty for commercial lenders that they can enforce clearly drafted prepayment clauses to protect their expected interest yield, even in the event of a borrower's default and subsequent foreclosure. The ruling reinforces the principle of freedom of contract between sophisticated commercial parties and treats such premiums not as an impermissible penalty but as an enforceable form of liquidated damages, subject to a test of reasonableness.

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