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Drafting Market-Based MAC and Termination Fee Clauses
Falling real estate prices, increased consumer defaults, and relaxed underwriting have all contributed to the U.S. housing crisis that has disrupted financial markets. With a recession on the horizon, higher-risk debt financing is now subject to greater scrutiny as is evident by equity sponsors and financing sources reconsidering prior commitments, and ratings agencies reevaluating and lowering their ratings on riskier loan portfolios. As such, the cost of the financing has become significantly more expensive and, in some cases, no longer available. This situation has caused various equity sponsors and financing sources to re-examine their obligations to consummate a distressed commitment, and their ability to back out of a deal.
Two types of contract clauses are commonly cited when a buyer or financing source desires not to make good on its commitment. These clauses are material adverse change (MAC) clauses and termination fee clauses. Several recent cases show that good draftsmanship and a clear understanding of their intended effect are essential in heading off disputes when implementing these provisions.
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