PDF DownloadPractical Tips for Negotiating Material Adverse Change Clauses in Commercial Real Estate Loans
By Christopher T. Nixon and Susan C. Tarnower

Probate & Property Magazine: March/April 2009, Vol. 23, No. 2

Real Property|Trust & Estate

Christopher T. Nixon is a shareholder in the Dallas, Texas office of Winstead PC. Susan C. Tarnower is an attorney in the Atlanta, Georgia office of McGuireWoods LLP.

Uncertainty in the current commercial real estate lending market has caused commercial real estate lending institutions to carefully re-examine and enhance the verbiage of their standard material adverse change (MAC) clauses in loan applications and loan commitments (both being referred to collectively in this article as “loan commitments”) and rate lock agreements. The MAC clause is a self-help clause that provides the lender with the right to terminate or renegotiate a proposed financial arrangement because of changed circumstances in the marketplace, changed circumstances of the borrower, or changes to the real estate collateral. Given the current turmoil in the national economy, most commercial lenders will insist on including a MAC clause in future loan commitments and rate lock agreements. Many even include them in loan documents, especially in asset-based lending. Borrowers and their counsel should carefully review the scope of the MAC clause when negotiating these financial documents. Failure to do so may result in the borrower incurring substantial financial loss if the lender elects to exercise its rights under its standard MAC clause.

The purpose of this article is to provide practical tips for negotiating MAC clauses in loan commitments and rate lock agreements to help mitigate the risks associated with the inclusion of such clauses.

What Are the Risks to Be Mitigated?

The primary risk to the borrower of the lender’s exercise of the MAC clause is a financial loss because of the borrower’s inability to fulfill a contractual obligation. In the real estate acquisition context, the borrower faces the risk that the lender will exercise the MAC clause set forth in the loan commitment after the expiration of the financing contingency period of the borrower’s purchase contract. In such event, the borrower may be contractually obligated to close the purchase transaction under the terms of the purchase contract despite the lack of available financing. The borrower’s inability to fulfill this contractual obligation typically results in the borrower’s loss of its earnest money under the purchase contract.

The financial loss a borrower may incur in the loan refinance context as a result of the lender’s exercise of a MAC clause could potentially be much greater. Many currently outstanding commercial real estate loans have a balloon-type installment payment due on the maturity date of the loan. If a borrower seeks to refinance such a loan with a new lender, the borrower faces the risk that the new lender may exercise the MAC clause set forth in the loan commitment, leaving the borrower without sufficient time to obtain financing from another lender before the maturity of the existing loan. In this event, the borrower may face foreclosure and, in some instances, recourse liability as a result of its inability to make the balloon installment payment due at maturity.

Similarly, a borrower is likely to incur financial loss if the lender exercises a MAC clause in its rate lock agreement for a proposed loan. In a rate lock agreement, the borrower pays a fee to “lock in” a certain interest rate for a proposed loan in advance of closing. In the event of a “material adverse change,” which a lender may consider to have occurred if the lender is not able to realize its anticipated rate of return for the loan given wide market fluctuations, the lender may exercise the MAC clause to “unwind” the interest rate lock. In this case, the borrower suffers a financial loss, regardless of whether the borrower elects to close the loan based on the then-current interest rate.

Practical Tips

There is no generally accepted MAC clause or ironclad MAC clause language. Because the purpose of the MAC clause is to protect the lender against unpredictable circumstances, lenders prefer a broad clause and typically do not attempt to identify specific circumstances to which the clause applies. An example of a broad MAC clause is as follows:

In the event of any material adverse change, as determined by Lender, Lender may terminate this Loan Commitment or modify the terms hereof.

A broad MAC clause provides flexibility to the lender in determining when a “material adverse change” has occurred and what might constitute such a “material adverse change.”

The primary objective for a borrower in negotiating a broad MAC clause is to limit the scope of the clause to the extent practical. A MAC clause with a limited scope provides the borrower with more certainty about when the clause is applicable, enabling the borrower to better calculate the risk associated with its application by the lender. The lender, of course, will argue that the MAC clause is intended to cover all unpredictable circumstances, and limiting the scope thereof defeats the clause’s intended purpose.

Given the typical insistence by lenders on a broad MAC clause, borrowers should be cautious in seeking major limitations to the scope of the MAC clause. Such efforts will most likely be futile and could cause increased delays and expense to the borrower in negotiating the financial document. For example, although it would be best if the borrower could require the deletion of the MAC clause from the loan commitment or rate lock agreement, lenders will likely insist on including some type of MAC clause in those agreements. Further, a borrower’s attempt to limit the scope of the MAC clause to only those events caused directly and solely by the borrower will almost certainly be rejected by a sophisticated lender.

In spite of all these obstacles, a borrower may want to consider the following practice tips and considerations in attempting to limit the scope of a MAC clause.

1. Define “Material”

Courts are generally presented with the following questions in litigation concerning a broad MAC clause: (1) was the event “adverse” and (2) was the event “material”? Although determining whether an event was “adverse” is somewhat straightforward, determining whether an event is “material” is typically a challenge in the context of a broad MAC clause.

Lenders intentionally do not define the term “material” in the MAC clause. Lenders want the MAC clause to cover all unknown and unforeseen adverse events. Defining “material,” or identifying specific events or causes that constitute a “material adverse change,” may limit the lender’s ability to assert the MAC clause in unforeseen situations. Further, most lenders prefer to use a standard, broad MAC clause rather than heavily negotiating the clause in the loan commitment and rate lock agreement to fit each particular loan. Although negotiating a MAC clause at the loan application stage of the financing arrangement may be both time-consuming and expensive (and the lender may require a deposit from the borrower to cover the lender’s legal fees in such negotiations), the real risk to the borrower is that such negotiations may “kill” the potential financing arrangement.

Materiality is a fact-based determination and highly dependent on the circumstances of each case. No baseline percentage or threshold amount is deemed “material,” absent specific language in the document. Given the fact-sensitive nature of the issue and the broad language of a typical MAC clause, courts typically consider a broad MAC clause to be ambiguous and require extrinsic evidence to determine the parties’ intent about what types of changes the clause was intended to cover. Any litigation on the issue will be an unlikely candidate for summary judgment and will require a full-blown trial.

Including specific, objective thresholds in the loan commitment and rate lock agreement provides both lenders and borrowers with certainty about whether a particular event is “material” and thus whether the MAC clause can be invoked by the lender if this event occurs. For example, a borrower may attempt to define a “material adverse change” in a rate lock agreement as an increase in market rate spreads of more than 200 basis points. Lenders, however, may be hesitant to include such objective thresholds in the MAC clause given that such thresholds may preclude the lender’s ability to terminate the financial arrangement in all other unpredictable adverse circumstances.

2. Consider Specific Exclusions to the MAC Clause

A borrower may consider listing specific exclusions to a broad MAC clause. An exclusion provision may appear as follows:

The following events shall NOT constitute a “material adverse change” for purposes of this agreement:

(1) Changes in the national economy that do not disproportionately impact Borrower’s business;

(2) Changes in laws and regulations that do not disproportionately affect Borrower;

(3) Changes in generally accepted accounting principles;

(4) Force majeure events;

(5) Terrorism events or military actions; and

(6) A building tenant’s failure to timely make a monthly rent payment

This example contains a short list of the myriad of exclusions a borrower may consider presenting to a lender.

Be aware, however, that, although specific exclusions will help to limit the scope of the MAC clause, such exclusions also may cause problems for the borrower. For example, specifying certain exclusions may cause a court to view any non-excluded conditions to be subject to the MAC clause.

A borrower should carefully consider whether to submit a broad MAC clause exclusion list at the beginning of negotiations, realizing that not all of the exclusions will be accepted by the lender. If a requested exclusion is ultimately not accepted by the lender, the exclusion may be used as evidence of the parties’ intent that the MAC clause cover the requested exclusion.

3. Include Reasonableness and Good Faith Standards

It is important to identify whether the determination of what constitutes a “material adverse change” is (1) objective, based on a definable standard, or (2) subjective, based on the lender’s determination. Lenders typically prefer the subjective standard, while borrowers should seek to obtain an objective standard.

If the lender insists on retaining a subjective MAC clause, the borrower should request the lender to act in “good faith” in determining whether a “material adverse change” has occurred, and such determination should be “reasonable.” The lender’s determination for when a “material adverse change” occurs should not be in the lender’s “sole discretion.” Although the “reasonableness” and “good faith” standards may be implied by law in certain states to interpret the meaning of a subjective MAC clause, it may be beneficial for the borrower to get the lender to explicitly include these standards in the MAC clause.

4. Be Alert to the Dual Provision MAC Clause

A dual provision MAC clause contains a broad provision together with a provision describing specific events that will trigger the lender’s right to terminate a loan commitment or rate lock agreement. This dual approach provides the lender with more certainty about the applicability of the MAC clause as it relates to specific events, while also preserving the lender’s right to assert that an undefined event constitutes a “material adverse change” entitling the lender to terminate the financial arrangement under the MAC clause. Examples of this dual provision MAC clause are as follows:

In the event of any material adverse change, as determined by Lender, or in the event there occurs a material adverse change in the U.S. Capital Markets, including but not limited to a change in swap spreads or spreads on CMBS securities, Lender may terminate this Loan commitment or modify the terms thereof.

Lender may terminate this Loan Commitment if any material adverse change occurs, or any additional information is disclosed to or discovered by Lender which Lender deems materially adverse as to the condition, financial or otherwise, business, operations, assets, or liabilities of Borrower.

A borrower should be careful to address both the broad provision and the specific provision of such a MAC clause in negotiations. A borrower should also be alert to the fact that the broad provision and the specific provision may be included in separate paragraphs or sections within the loan commitment or rate lock agreement.

5. Watch Language Construction

The language of the MAC clause is critical. In negotiating a MAC clause, a borrower should pay particular attention to word choice and consider every word in the MAC clause in light of the circumstances of the particular transaction. Exacting language is particularly critical for any negotiated carve-outs from the MAC clause.

Be aware of any expansive language. A borrower does not want to be responsible for a change that may be reasonably anticipated to occur. An example of this type of expansive language is:

Borrower breaches in any material respect any material contract or obligation which has resulted or may reasonably be expected to result in a Material Adverse Change.

6. Seek Fee Reimbursements from the Lender

Although rarely will a borrower be made whole if the lender terminates the financial arrangement based on the MAC clause, a borrower would like to have the right to recoup some of its losses in such event. The borrower and lender could agree on a capped amount of damages paid by the lender to the borrower if the lender exercises the MAC clause as a result of a “material adverse change” outside of the borrower’s control. More common, however, is a provision for the return to the borrower of all (unspent) loan commitment and rate lock fees paid to the lender. At the very least, the borrower should be able to request from the lender the release to the borrower of all third-party reports obtained by the lender in anticipation of the closing of the loan. The borrower may then be able to submit these current reports to obtain a loan from a competing lender and may ultimately alleviate some expenses for the borrower.

7. Be Sensitive to Lender Risks in Asserting the MAC Clause

Depending on the facts of the situation and the particular language of the MAC clause, a lender may be hesitant to rely solely on the MAC clause to terminate a financial arrangement. The broader the MAC clause, the more uncertainty the lender has in evaluating whether the MAC clause is applicable to the alleged “material adverse change.” This concern, in particular, is one reason for the increased popularity for including a dual provision MAC clause.

Case law also may deter lenders from terminating a financing arrangement based solely on a broad MAC clause. Courts have not yet developed a standard test for evaluating MAC clauses and will carefully review the language of the MAC clause and the extrinsic evidence, if necessary, to determine whether the MAC clause provides the lender with the right to terminate the financial arrangement. No court has yet faced the pressing issue of whether the recent credit market fluctuations are “material” under a broad MAC clause. Given the uncertainty about how a given court will rule on the issue, lenders may be hesitant to terminate the financial arrangement based solely on the MAC clause.

8. Attempt to Conform MAC Clauses

Commercial real estate and asset-based lenders often include MAC clauses in their loan documents, especially in transactions involving the release of funds over time, such as credit facilities, revolving lines of credit or cash advances on asset-based transactions, or real estate transactions with earn-outs or some other form of future funding. A broad MAC clause typically provides that the occurrence of a “material adverse change” constitutes an event of default by the borrower under the loan documents. A “material adverse change” may then be defined to include changes in business, operations, or financial condition of the borrower. Borrowers should seek to have such a clause deleted from the loan documents. If the lender refuses to delete the MAC clause, the borrower should carefully review the MAC clause in the loan documents and seek to limit it in the various ways described above.

This MAC language may be found in the loan agreement, the note, or the security instrument, so all documents must be carefully reviewed. In addition, all applicable definitions must be carefully examined because in many instances that is where the MAC clause is expanded. For example, the loan documents may state that the lender has no further obligations under the loan documents if a material adverse effect occurs. The definition of “material adverse effect” will then include, as determined by lender in its sole discretion:

(i) a material adverse effect on the financial condition or creditworthiness of the borrower or any guarantor, (ii) a material adverse effect relating to the borrower’s ability to perform its obligations or responsibilities under the loan documents, (iii) a material adverse effect concerning the validity or enforceability of the loan documents, or (iv) a material adverse change to or disruption in the financial and/or banking markets wherein the lender cannot be expected to continue to advance funds pursuant to the provisions of the loan documents.

Depending on the circumstances, a borrower may be able to limit the scope of the MAC clause in the loan documents in a manner similar to the MAC clause limitations obtained in the loan commitment.

In the real estate acquisition context, if the borrower has successfully negotiated a MAC clause in the purchase agreement, the borrower may request that the MAC clause in the loan commitment mirror that of the purchase agreement. If the lender refuses to agree to such request, the borrower should recognize the risks associated with the difference in the two MAC clauses.


Commercial real estate lenders will certainly require the inclusion of carefully worded MAC clauses in loan commitments and rate lock agreements given the turmoil in the current commercial real estate lending market. Borrowers, however, may be able to mitigate the risks of potential financial losses resulting from their lender invoking the MAC clause by limiting the scope of such a MAC clause in light of a particular loan transaction. A careful review of the MAC clause and consideration of the practice tips in this article may help in such an analysis.

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