On the lender liability front, Lenders should consider the risk that a Borrower will make claims that by not honoring draw requests and/or by exercising remedies, the Lender acted improperly and damaged or destroyed the Borrower’s business. As further discussed below, there are questions regarding the sorts of adverse changes that qualify as a “material adverse change” default, questions about when a situation crosses the line from something concerning to the Lender to an actual default that can trigger the exercise of remedies, and question about whether a default is material enough to justify a Lender's actions if it is COVID-19 related and considered temporary. While there can be legal uncertainties in any default situation, the COVID-19 environment has added legal uncertainties because there are relevant issues that have not been extensively tested in the courts. In this challenging business scenario, there are also legal risks. Also on the business side, there are reputational and relationship issues, since the Lenders will want to maintain good relationships with borrowers, sponsors and other customers. This means Lenders are navigating through challenging underwriting scenarios. The economy of the country, and the world, is in an unprecedented state, with uncertainty ahead. Lenders are facing complexity and uncertainty on the business front. Lenders will want to stick with the fundamentals in managing these defaults. Lenders and Borrowers are experiencing default situations as a result of the COVID-19 pandemic and related economic fallout.
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