Practical legal essentials for commercial lenders

Matthijs: Hi, everybody. I'm Matthijs van Gaalen and I'd like to welcome you to our seminar series entitled 'Practical Legal Essential for Commercial Lenders'. We're so excited to be able to put on this special seminar that's prepared as an introductory class and seminar on taking security and key aspects of financing real estate. While this seminar is prepared as an introductory seminar for these topics, when common issues we'd like to also identify them. So they're not only good for junior lawyers, but also it's great as a refresher for seasoned professionals as well. This seminar is being put on by our awesome team at Gowling WLG. Pam Green and Mark Giavedoni, both very seasoned real estate professionals, who I trust on deals that involve purchasing real estate, interesting title issues or construction issues, are going to be joining us at one o'clock for the financing real estate session. But right now I'm going to be joined, and I'm joined by Patrick, who just joined Gowlings last month and I thought there's no better way than to put him in front of a hundred people and present on lending topics. He has over 5 years of experience in both real estate and lending. So he's going to be joining me for this first seminar which deals with taking security. For those of you who have not met me, I am Matthijs van Gaalen. I am a partner in portfolio lending practice, which is our team in Hamilton, that deals with specifically mid-market transactions and moving them very quickly to close. Now those of you who know our team well may be wondering where is Stephanie Harvey. She's missing from this presentation because she'd usually be participating. Well she's not here because her awesome husband decided to take her up to a warm destination and she's boarding the flight right now. So for those of you who work with her regularly I strongly encourage you to send her warm wishes, by email, so that when she lands from her flight, and gets back reception, she has a mini heart attack from all unopened inbox messages. For the rest of this presentation your microphone and camera are going to be off but you can participate in our chat function, by either asking a question or just generally posting, and if we say something great you can also click the thumbs up button just to show your sentiments. If a question is posed by another participant you can upvote it so it gets our attention more. So if we have a hundred questions, and some are upvoted, we'll try to get to those first as we don't know how much time we're going to have. So with that I'd like to begin our first session which is entitled 'Security 101'. I'm just going to share my screen. There you go.

In this session we like to cover a couple of issues. So obviously there's security but the most important thing is knowing who your client is. We're going to spend a couple of minutes on speaking with corporations, and corporate authority, then speak about the different types of legal entities that you might run into and should be aware of. Then we're going to move onto types of security that are very common. Obviously there's going to be a lot of different types you can take but we're going to focus on some of the most common ones. We're going to go through priority issues, and try to explain some of the key concepts when it comes to priority issues, and we're going to summarize those points with a session that's saying, now that you know these things how do you design a solid security package? Then finally we're going to take kind of a case study and look at one of the most common issues that comes up on commercial lending, structuring transactions, which is a shared purchase transaction.

To start off, corporations. These are the most common entities that we see in commercial lending transactions. So just to go through it, if you're asking for the details of a corporation you'd be asking for the Articles of Incorporation, or Articles of Amalgamation, or Articles of Continuance and these might be amended. Those kind of set out the key provisions of a corporation, and they're often accompanied by something that's called Bylaws, which often have the borrowing powers of the corporation. So you'd look to those to see how does a corporation go through borrowing. Is it through the directors having a resolution? Or is it through the shareholders have a resolution? That's important because sometimes there's transactions that you might do them might not involve a lawyer. So if you do get Articles or Bylaws, that is probably a good place to look quickly. Corporations are owned by shareholders. So this can be common shares, preferred shares, there can be a very big distinction and what's important to understand in this is that sometimes shares might have a characteristic of a required dividend, or that they can be redeemed. So to make sure that you know if money is outflowing, from the corporation, those are certain rights that you may want to look into. What's also important to know is that corporations liability is limited to the corporation. So just because a corporation is your borrower doesn't necessarily mean the shareholders are responsible for the corporation's debt. That's why you often see personal guarantees from the shareholders. So if the corporation is your only entity in your borrowing arrangement, and you don't have a guarantee, if there's no money in that corporation you can't go to anyone else except for the corporation and the personal guarantee creates that attachment, which Patrick will speak about a little bit later.

What I want to mention about corporations too is one of the most common issues we get is, okay, I have a corporation. When do I need an SLO, or solicitor letter of opinion? When do I need a resolution? That's an extremely common question that we've had with commercial bankers. So just to go through that, corporations and the signing authorities, the presidents of the companies, have the ability to enter into contracts without having the person they're entering into question if they have the authority to sign for that corporation. So if a president signs a contract, the person they're signing it with doesn't have to say, "Do you really have the authority to sign that contract?" The same goes for a bank. If a president comes, and everything is pointing towards that president having the authority to sign a contract, the bank could assume that they have that authority. That's called the indoor management rule. So you see sometimes in small business banking, or smaller contracts, smaller borrowing arrangements, where no resolution or opinion is needed. That's because the bank is relying, whether it knows it or not, on the indoor management rule. Now the bigger the deal, or the more complex the deal or the more shareholders there are in a deal, the more likely the bank is to say, "Well, we want some additional assurance that you do have the authority to sign this." and we know that most corporations require a director's resolution to enter into a borrowing arrangement. So then the bank will say, "Can you please show us a director's resolution that shows that you have the authority to enter into these agreement and who from the corporation can sign them?" That's where you get the director's resolution. But sometimes certain actions of a company need to be passed by shareholders. So in those situations, not only would you have a director's resolution, but you may also have a shareholder's resolution. That's not particularly common in commercial banking but we do see it every, you know, 2%25 of the time that a shareholder's resolution might be needed. That's often when you have silent shareholders, who might not be involved in the day to day business but might own a large stake in the company, and might not want the president or a director who is involved, to make substantial decisions or a certain set of decisions without consultation. An officer's certificate is something that you hear of, generally when it comes to an opinion, and that's a document that has representations in it that the lawyers would rely on to issue their opinion. What an opinion is, is it's effectively just saying the lawyer has looked at this transaction, looked at this company and confirms that the company does exist. That it has the corporate power to enter the documents it's purporting to enter into. That it doesn't conflict with anything. That the registrations are in place. So those would be situations where you hear of solicitor opinion and that's common in commercial lending transactions; over a million dollars or two million dollars to be requiring a solicitor letter of opinion. That's where that comes up.

But corporations, while the most common, aren't the only borrowers. Obviously we have individuals, who sometimes are the shareholders, but we also have things called sole proprietorship. That's where a single individual is running a business through a business name and they're not using a vehicle, a corporate vehicle. So that means that they are actually personally liable for the obligations of that sole proprietorship. So in those situations you don't necessarily need a personal guarantee to back it up because there's no limit on liability like there is for a corporation. Then you have general partnerships which are the relationship between two or more individuals, or other entities, that carry on business and this is typically formed through a written agreement but, generally speaking, it can be just formed from two or more people acting to make profit. That forms a partnership. Then you have something called a limited partnership, and that's always formed through a formal written limited partnership agreement and a filing of the declaration, and within the limited partnership there's two types. There's the general partner, who is actively involved in managing the business and is fully responsible for all the liabilities of the limited partnership, and then the second type of entity is the limited partners, who are more passively involved and do not have the unlimited liability that would characterize the general partner. Then trusts. I do see trusts come up quite regularly and these are very custom arrangements that are documented through a trustee, and it would be my recommendation to always consult a lawyer whenever you see that to make sure that the trust is executed and documented correctly. It's common that they're not purporting to execute it correctly, and we actually review the trust documents and have to take a look and double check that they're doing things correctly, because it's common that issues arise when it comes to trusts. So with that, we'll move on, unless Patrick has seen a question that he wants to pose to me, to the securities section.

Patrick:  Yeah. Thanks, Matthijs, and certainly everyone feel free to pop in the Q&A if you have any questions as we go and we'll keep on eye on it. So as Matthijs mentioned, a guarantee, we're probably all familiar with this. It's something very common to be included. For you bankers, in terms of satisfying your credit obligations, you will have your borrower but if it's a new entity, or if it's a subsidiary, or if it doesn't have a past track record, you may need to get other individuals or entities involved in guaranteeing and being responsible for the debt. Generally in a commitment letter or a loan agreement, you're going to have the borrower sign, you may even have the guarantor sign. But generally there will be a separate guarantee document which includes the full suite of obligations of the guarantor and the rights of the lender to proceed against them. That would be a separate document, and while the commitment letter or loan agreement creates the indebtedness obligation of the borrower, the guarantee is needed to tie in any other entities or individuals. So on that note, one common error that we see in loan agreements and commitment letters is we'll see the borrower on there and then we'll see a security block, which it might have specific assets on it, specific equipment or maybe a piece of land to be mortgaged. When we search the ownership of that land it won't belong to the borrower, it will belong to say a shareholder, or a subsidiary or a parent company and we can't actually take security that's enforceable unless it's backing a debt obligation. So you always have to make sure that if there is secured assets which you're looking to back the indebtedness, who owns those assets? We need a guarantee as well basically to tie that security back to the debt. So guarantees come in a couple of forms. A lot of times you see an unlimited guarantee which means essentially the guarantor is responsible for all of the obligations, for the full indebtedness of the borrower, and in other circumstances it may be limited and one of the most common ways to limit that is to limit an amount. So you may have a loan for 10 million dollars and a guarantor is going to say, "Well, listen. I don't want to be responsible for the full 10 million, and I'm hoping that I can get past sort of all your credit requirements if I just provide you with a 2 million dollar guarantee, or 3 million dollar guarantee." That just means when you seek to recover on that debt, if unfortunately you have to do so, there's a maximum amount that you can seek from that guarantor. This is common when there's multiple shareholders or a limited partnership with multiple limited partners where, again, say you have a 10 million dollar loan with four partners, they may say, "It should be good enough for us to each give you a 2.5 million dollar guarantee and therefore, from the four of us, you could collect the full amount." But if it's unlimited you could actually collect the full amount against any one of them. Again, it's more of a negotiating point with borrowers where they will try to limit it, obviously, and the lender will want unlimited, generally.

So there's also limited recourse which just means the guarantee is limited to the enforcement of specific assets. We see this a lot with share pledges or mortgages. If you have a guarantor who's granting a mortgage, say one of the shareholders over their personal home, they may want to have it limited in recourse so that if the bank has to enforce and collect on its indebtedness, it can proceed with power of sale proceedings on a house, or a receivership, and seek to sell that asset to collect proceeds to repay the debt. But as soon as it collects those proceeds, regardless of the amount, that's the extent that the guarantor will be responsible for and it's essentially off the hook after that.

Another topic that often comes up is independent legal advice. This is an issue where the bank wants to make sure that the people who are giving the guarantees are not going to come back later and say, "I didn't understand what I was signing. I didn't understand the nature of this business. It's my husband's business." on and on and on. You want to make sure that if there's any concern that the person has no financial interest in the business, or has no financial knowledge of the business, you may want to consider making sure that that person gets independent legal advice. I see that there's a question. Do you guys see many unlimited personal guarantees? I would say yeah we do. Certainly a new business, like a brand new corporation just starting out, basically there's nothing for the bank to rely upon in order to loan that entity any money. So what they're going to do is essentially the corporation might be the borrower but the lender is going to rely on, presumably, the net worth statements and the assets of a guarantor. So if we can go to the next slide.

Now we're talking about security agreements. Security, you can get a security interest in essentially personal property or real property. A security agreement, generally we're talking about personal property. Real property, anything like land or the building affixed to the land. Personal property, anything other than that. So basically you're talking about inventory, equipment, the computers that are at the business, the office furniture, the manufacturing equipment. We're talking about even assets like intellectual property and accounts and cash. If it's an asset and it's not real property, if you get a security agreement, you're binding and getting an interest in those assets. The important thing, to really go back to basics about what is security? What is a security interest? I think of it in terms of it gives you really three things. It restricts transfer and provides notices to others that you have an interest. So that borrower can't just sell a bunch of assets to a third party because, generally, in an asset sale a purchaser's going to search to make sure there's no security interests and if they see that you, as the lender, have an interest they're going to make sure that gets dealt with before they contact it. So it keeps the assets in the borrower's possession. Enforcement. A security agreement gives you the rights to basically collect upon your loan by taking possession of the assets, or appointing a receiver to take possession of the assets, or the business. Priority on proceeds. So what happens in the event of enforcement is, generally worse case scenario, the assets are going to get sold to repay the creditors, and having a security agreement makes you a secured creditor and depending on the priority, which Matthijs will talk about later, of your security you want to be as in high a position as possible to collect on the proceeds before there's no proceeds left. Next we'll talk about, for the next slide, real property.

So we know about mortgage is a very important piece of security for lenders. When we're talking about buying a residential home you might have a conventional mortgage where the debt essentially is the mortgage. When we're talking about business loans, we're often talking about collateral mortgages. So the mortgage is just registered with a certain principle amount, probably higher than even the loan is or sometimes at the loan amount, and it's just a collateral piece of security that attaches to a piece of land and secures, again we're talking about priority of security, the position of the lender. Again, we have the same considerations with a mortgage as a security interest. Restriction on transfer, the enforcement ability, so power of sale or receivership again, and priority on proceeds. There's a couple of general questions that come up. Can you put a blanket mortgage over two or more properties? Yes, you certainly can do that. There is a tricky issue where properties are in different land registry offices, which are sort of geographic cutouts of say the Province of Ontario, you can't register one mortgage across two land registries so you have to register two separate mortgages. It can be essentially identical though. Can properties be added to a mortgage? So say down the road a borrower says, "Oh, I want an increase and I just want to add this other property." Well you can't really add it. Again, you need to do a new mortgage, which again can be quite identical but it is a separate mortgage at that time. It may secure the same indebtedness. You can subtract properties from a mortgage. If a borrower says, "Hey, I'm performing really well. I really want to release one of my properties from a mortgage." you can do a partial discharge of a mortgage while keeping the mortgage on another property.

Onto the next topic, again to do with real estate. Another important piece of security for a building where there's a tenant is a lender will want to make sure they have control of what happens with that building and the tenants, in the case of enforcement, and one of the things they'll take is an assignment of rents and leases. So assignment of rents is important, because if there's an enforcement situation, the lender wants the ability to directly collect the rents from the tenant. In terms of an assignment of lease, that actually gives the lender the ability to step into the shoes of the landlord, if there's default, and actually sort of take possession of the building and manage it as if they were the landlord. So there's some very important considerations to take if you're going to step into the shoes of the landlord. A lot of the times, what many of you will have seen is, if there are leases of the property a lender will want to review those leases, and may even want to enter into, or make sure the tenants give estoppel agreements, just confirming the terms of the lease and an attornment agreement, so that in case a lender steps in, you want to make sure that tenant will remain obligated to that landlord to continue to be a tenant. There's also sort of two types of these registrations in security. One is general. You just say I have a general assignment of rents and leases, and that means I registered on title, and that encompasses any current and future leases and rents. You can also take a specific assignment of leases where you are just looking to get an assignment of one or more leases in the building. You can also look at this, there's a separate topic if you're basically lending to a tenant, and you want to take charge of their lease, and basically get security from the tenant in that way. It's sort of a separate topic but you can look at this from lending to the tenant as well and registering something on title to make sure that the lender is protected in the event of a default of the lease.

Onto the next topic which is assignment of insurance. So you'll all have seen in loan agreements and commitments letters an obligation for insurance. What this does is it names the lender as a loss payee. So if there is some insurance payout due to some damage, or loss of secured assets, we want to make sure that the borrower can't just take that money and run. We want to make sure that the lenders involved in the process of whether the insurance is going to offer to replace those assets, or if they're just going to walk away and payout some proceeds, we want the lender to get those proceeds first to paydown their loan because the whole basis of the loan was those secured assets, sometimes. So there's some unique situations that we often get questions about. Condominiums. A commercial condominium unit. The actual condominium corporation will ensure the entire structure of the condominium, the roof, the walls, even of a unit up to a certain point, and they will have their own insurance certificate for that. But you'll also probably want the occupant or unit owner's certificate, which covers the assets that belong to your actual borrower, if they're a tenant of a unit like that. There's a situation where you might have a landlord where the landlord is your borrower and the tenant actually ensures the building. This can be a nightmare scenario where you're actually wanting the tenant to assign to the lender some insurance proceeds. The tenant's not even your borrower. This is a very difficult situation and if you find this, you're going to want to basically address this in how you're going to structure your loan from the outset, before it gets to the lawyers office and they tell you, we're going to have a big issue here. Sometimes you'll see insurance less than the mortgage amount and, again, you might have a very modest building on a very valuable piece of land and therefore, the cost to replace the building will not be anywhere near the cost of the land, when the loan is based on the value of the land. So you might have insurance that's lower than your mortgage amount even but as long as it's replacement value, meaning they can return the land and the building to the state that it was, you can generally be comfortable with an insurance amount that's less than your mortgage amount.

Onto my final topic, in this segment, which is a share pledge agreement. So, again, as Matthijs mentioned there's many different types of security documents and interest that you can obtain. We're not going to cover them all here and many of them are called different things by different lenders. One of the things is a share pledge agreement, which you can get, which is if your borrower's a corporation you may want to get a pledge of the shares of the shareholders of that corporation. So, again, remember first you're going to need a guarantee from those shareholders and then when they pledge you the shares, an important thing for the bank is that gives them control over this company, essentially. Not immediately but you want to take possession of the share certificates, and potentially have the right to take over voting rights of those shares, or receive dividends from that company. These are things that the bank might be interested in, but often that borrowers don't really want to give up, because there are administrative duties involved in getting the original share certificates. The lender actually has to hold them in a safe place where they can identify them and return them on the payout, and it can be somewhat cumbersome for the borrower if they're doing simple corporate transactions or simple corporate reorganizations that a lender may permit, well they may have to return the share certificates and do a new share pledge agreement each time. So sometimes these are not as common a piece of security, but where there's a big company where you really want to make sure that nothing goes sideways, this can be an effective way to sort of exert control as the lender. So now I'll hand it back to  Matthijs to talk about, now that you've got all the security in place, what are the priority issues that you need to be concerned about when there's other creditors involved at this point.

Matthijs: For sure. I see a bunch of questions coming in. We're going to push on a variety of topics. We're going through those at the end. So just keep the questions rolling in and we'll deal with them at the end. You can send them as they come to your mind. So on priority issues, we see this a lot. We get a commitment letter and its says I want a postponement agreement, a subordination agreement, an assignment agreement, a standstill agreement. A lot of different terms, when you're dealing with priority issues, are thrown out there. What we'd like to do is just take a step back and instead of talk about the terms, first talk about the needs that a lender might have. One of the things that a lender might need is to confirm that there's no other interest in a specific asset. For example, if there's a purchase transaction going on, you might want to know that there's not an interest in the assets that are being sold. If you're financing a piece of land, you'll want to know that any personal property rising from that land isn't covered by other registrations that might be on title. You may want to confirm that instead of having no interest in an asset that the other lender is limited to a specific asset. For example, if there's a car manufacturing company registered, you may want to say, "Is your registration limited to the car that you provided, or that you're providing leasing facilities for?" You may also want to confirm that your interest has priority over certain assets or is subordinate on some things. You may want to limit the payment of money to other creditors, either by a certain interest amount that can be charged, or set principle amount that's allowed to go out, or that only money can go out when they are not in default under your lending arrangement. When things go bad a lender may want the ability to stop the enforcement action of other creditors. If you are the lender, that is the largest one and there's a minor lender in place, you may not want, or related lender in place, you may not want them to be able to start bringing this house of cards down and starting a law suit. Or you may want at least some time to consider what to do about that enforcement action. Also you may have on opinion on how the assets get distributed in an enforcement. So those are the needs that a lender has whenever there's another lender at play, and that brings us back to the concepts, and the wording that is used associated with those needs.

So when you hear the concept of postponement generally, not all the time but generally, it's associated with the term of postponement of payment. Which effectively is putting a limitation or a restriction on payments going out. So oftentimes we see you can make payments until they're in default with this lender and when they're in default no more payments can be made. We also see you can make payments but the interest can only be a certain amount. 5%25 or less. Or you may make $20,000.00 payment monthly but no more than $20,000.00 blended between interest and principle. Or you can say no interest, no money is going out whatsoever, unless we consent to it. There's are very common things that a bank or a credit union or a lender will have to consider when they're looking at a borrower. What payments are they fine? How they going out and what are those conditions? A subordination generally refers to a subordination of a security interest. So if things go bad who has priority over the assets? It's literally a ranking. So oftentimes we'll see one lender say, I get the real estate, equipment and another lender will say, I get accounts receivable and inventory. Those are a common break. But that's necessarily the case. There could be equipment loans out there. So it could say, you have priority over any equipment that they currently own, financing, and future equipment that they buy and we have priority over everything else.

Assignment as a concept is a very big term that goes under the radar a lot. It is literally the person giving up the right to the debt if the bank requests it. So the most appropriate context for this is where there's a sole shareholder who's owed money from the company that they solely own. If there's an enforcement you don't want that shareholder at the table as a creditor. You're like, well you caused all these issues so get back to the shareholder table and you don't have a place here at the creditor table. But the second you have, for example, three shareholders and one has put a million dollars in, and the others have put nothing in but they're still equal shareholders, that one who's put a million dollars in may say, I'm not comfortable with being at the shareholders table only. Right? I'm not comfortable assigning my interest to the bank because once I assign it I don't have a claim to this million dollars I've injected. So once one starts with inequality in terms of shareholders, that's where the assignment concept gets very complicated. So it often leads to a lot of discussion when you're dealing with sophisticated borrowers. Then you have a standstill which can either be literally standing still on enforcement, so you can say you're just not allowed to enforce, ever. So that can be an affiliated entity or you can enforce after 120 days, 90 days, 10 days or just give me notice and then you can enforce. Right? So not every lender is equal. So if you have a lender that's a real estate lender and who's backed by land, versus an operating lender, an operating lender may say, I need to go in right away. I can't give you much notice because the inventory's going to be gone. Or I need to move fast to sell this business as a going concern. A real estate lender may be like, if it's 120 days, the land's still going to be there. So it's a very custom and context driven exercise to negotiate standstill agreements and, in fact, it's very context driven to negotiate all of these provisions, regardless of what they are.

When you hear a priority agreement, inter-lender agreement or inter-creditor agreement, those are general names that say there will be a document out there that covers the things we've mentioned. So if you as a lender put in your loan agreement, I need a priority agreement, and you send the loan agreement to a lawyer and you don't get a call back saying, can you please talk to, what are you going after here? Why do you need a priority agreement? What is your goals with this priority agreement? Then there's probably something missing there. It is a conversation piece that a lawyer needs to get direction from a lender in terms of like what is it that's important to the bank. These can get very complicated depending on the complexity of the number of creditors and what are their interests.

A no interest letter is literally as it says, I am confirming that I have no interest in this asset. I may have a GSA and you may come in and say, I'd like to finance this other piece of real estate, the entity of the GSA is saying to the company that's going to finance the real estate, I have no interest in the personal property that's arising from that real estate. Or if you're doing a piece of equipment and you want to finance this equipment, you go to the person to who has the GSA and say, please confirm you have no interest in this equipment so I know that I can lend, lease it or finance it.

The PPSA estoppel is the opposite. You're confirming that your interest is limited to a specific asset. So a specific vehicle. That's the most common context for this or a specific piece of equipment. So oftentimes a registration will be in place that is just too broad which brings us to reviewing PPSA searches. This a really important topic because oftentimes lawyers are only engaged when there's a priority agreement in play, or there's real estate, or a purchase or a payout going on. Bankers will do many transactions without engaging legal counsel which leads to reviewing PPSAs. My general advice is when you look at a PPSA you need to understand why an entity is popping up, and why it's there, even if it's above or below your registration. Registration priority is generally based on who registered first. So if a lender puts an effective all personal property registration on, and other things come up, it doesn't necessarily need to worry about priority unless there's a super priority interest, but it's generally in place but it's still good to know why these other entities are there, specifically when it's like a manufacturing company or something that pops up. But this becomes more of an issue when let's say you look at a search and there's 5 registrations and you're coming in at 6. Then you want to have confidence that those registrations ahead of you either shouldn't belong and get discharged or that they're limited in scope. The way it works in Ontario is it's called a check the box system where you click off the categories of collateral you want an interest in. So inventory, equipment. Unless you limit it that check the box, through our collateral description, the registration is effective against all equipment or all inventory. That's why when you get a lawyer saying, there's registrations in favour of this vehicle manufacturing company but they're not limited enough. We need to get a PPSA estoppel. It's because the language used in the collateral description isn't sufficient to give us confidence that the check box on equipment is truly limited to only the finance equipment. So it's very important for a banker to look at that language, and often get legal advice, to make sure that it says clearly it is limited to the finance asset. Not just listing the asset but setting out a limitation. So our security interest is limited to this asset or our security interest is limited to the finance or leased assets done by the secured creditor. With that I'm going to turn it back to Patrick to chat about and recap for designing a solid security package.

Patrick: Yes, so here we're trying to put ourselves, when we get a commitment letter or loan agreement, put ourselves in your shoes and say, how did they work their way through this? Why is it designed the way it is and sort of what things do we hope that they thought about before we started digging into how we're going to put the security together. So the first thing is, and you're already doing this with all of your compliance and KYC requirements, is identify who you're dealing with. Really what can be very helpful at all stages is having an accurate and detailed corporate org chart with directors and shareholders, and sometimes there's trusts who own shares, and they have trustees. Sometimes lenders will ask us to get certain sort of know your client documentation filled out, or get the borrower or their shareholders to sign things when you've got a shareholder who controls more than 25%25, and that can be hard information for anybody to gather but we're sort of hoping you're doing a lot of that work up front to understand how the chart works. This leads into the second point of who owns the assets? So, again, we talked about the guarantees and attaching guarantees where you're securing assets, and essentially you want to build this fence around the borrower group because, as Matthijs was discussing, you want to know where the money can leak out of this borrower group because you have certain security on assets, and you may have debt ratios and you may want to postpone leaking money to go back out to shareholders when they should really be repaying the lender first. Then again the ownership of assets. So land, you can identify that pretty easily with a title search, but personal assets, there's no registry for who owns personal assets. So a lot of the times you're going to be relying on: are they on the balance sheets and financial statements of these companies; and are they on the proper ones with the entities that they think they're on; and is that a borrower of ours or do we need to add this company as a guarantor because it owns a very high value asset of this group that we need to rely on? So ownership of assets is also key. Then, again, aligning the security to the types of assets.

So we've got land. So we've got mortgages and debentures, assignments of rents and leases if there's tenants. If there's intellectual property or inventory, you need a security agreement. Maybe you want to specific certain assets in there and make certain restrictions about where they're located. Bank accounts. Do you want just sort of a very specific, there's different documents that different lenders call that secure an account, and maybe freeze it and allow that lender to have specific rights to do with a GIC or an investment account or something of that nature that's going to be provided as security. Interest of other creditors. So, again, many lenders will run, as part of their credit process, a PPSA search and they'll see a bunch of other creditors on there. It's important to start thinking, like Matthijs says, why are those creditors there? What's going to happen to them? When I loan my money to this borrower am I expecting all these creditors to get paid out and disappear? Or are they going to continue providing loans or financing to the same borrower and I need to think about do I need a priority agreement with them? Is the registration just a Ford F-150 that my borrower uses and it's in their company name and the PPSA is limited to that truck? Well maybe I'm not as concerned about that if I'm not relying on the value of that truck to do my lending. So there's many different levels of things you can be concerned about, and you've got to think about what you're going to do with them and that's going to be reflected in your commitment letter, and what priority level you need for your registrations and what certain exceptions that you allow are.

So jurisdiction. Again, is this only assets in Ontario? Is inventory travelling across Provinces? Do we need registrations in separate Provinces? Is your lawyer going to need to get another lawyer from another Province to do registrations in that Province and that's going to escalate the cost to the borrower getting this package in place? Jurisdiction very important. Are assets travelling through the US? Do they have entities or accounts that area based in the US? There's obviously some other important issues that you may want to seek internal compliance advice or legal advice with how to structure it in the face of those sort of more unique issues. So I'll now pass it back to Matthijs to sort of take you through a usual transaction, and how we see it and how we think that lenders can be thinking about it, to know what they're doing and the considerations they need to take in place.

Matthijs: Yes, so I like to always end these Security 101 presentations with a conversation about share purchase transactions because it's actually these transactions that I see very common. It's very common to see the loan agreement come to us not structured correctly. So we have to have a conversation with the banker about how is this purchase transaction being structured and kind of take a step back. So whenever there's a share purchase transaction I always encourage you to reach out to your preferred legal counsel, to just have a conversation early on, just to make sure it's going through risk and getting documented correctly in the loan agreement. It looks pretty straightforward here. We have a person, it can be an individual or a company, that wants to buy the target company. They have decided, for some reason, that they're going to do it through a share purchase transaction. So a share purchase transaction is the sale of the shares versus an asset transaction, where the target would effectively just sell the assets of the target, but the target would stay under the vendor. What we have here is the lender coming in often and saying, we will provide you with a financing. So the correct approach is to put in a purchasing company. The reason this is the case is because if the lender wanted to send the money to the purchaser, what you'd have is the target moving over, but the loan would still be sitting with the purchaser and the target would be under the purchaser. Now the reason is this is important is because, generally, the lender would like to see the person who owes the obligation, like who has the operations of the company, being the one who has the debt. Specifically if there's an operating line. It would be inappropriate for it to be at the purchaser's level when the target is the one going to be using the operating line. The other reason, if the lender sends it to the purchaser rather than the purchase co, it would be a problem because then the target would have to send the money up to the purchaser, which can cause tax, for the repayment of the loan. So the proper approach is for the purchaser, whether it's a company or individual, to create a numbered company, we call it purchase co here, which is the borrower of the loan agreement. It will be the one that sends the money over to the vendor and the vendor then provides an exchange of the shares that it owns in the target. So on the next slide we'll see the target company moves over.

As it currently stands we still have our problem. Right? We still have the loan with the purchase co, which has no assets other than the shares, and the target is the one who actually should be using the money and is likely the one that is going to be repaying the debt. Then right after, immediately following this transaction, there's an amalgamation. A short form amalgamation that takes place. And there you have your borrower. Now so let's back up because we often see that a lender will say, I want the target company to be the one that repays the debt. So it is very, very common for us to receive a loan agreement where it has the target's name on it as the borrower. Now why is this a problem? It's a problem because you have a little bit of a chicken and the egg situation, where you need the lender's money to buy the company, so the loan agreement has to be in place. But the people who have the authority to sign for that target company, being the people associated with the purchasers, don't have the legal authority to execute that loan agreement until after the purchase transaction takes place. So if you have a loan agreement that's signed using the name of the target, even if that's to mean the company will continue to operate under going forward, that's signed by people who don't have the legal authority you could raise questions about enforceability of that loan agreement. So that's why it's important for the purchase co to be the one signing it, because they have the authority and the signers are in place and proper, and then once the process takes place you'll be great.

Now the issue is that, two things. One is that we have now under the loan agreement a numbered company that right after the transaction isn't going to be the name of the company that's going to be operating the bank accounts. Right? It's a numbered company that probably will be forgotten by the bank, going forward, because they'll be using the borrower's name. So I generally advise is put the numbered company on the loan agreement, and then under brackets say, to be incorporated immediately after closing with this entity and continuing as that entity. Just so that future reviewers of the deal understand how this numbered company fits in. From a legal perspective what we get is we get one security package that is from the purchase co. Right? Just in case the transaction stalls and they amalgamation doesn't take place. At the exact same time, in our possession we'll already have a fully executed package from the target, or the amalgamated target, so that even if the transaction stalls halfway through the bank is fully secured. It may not have the structure it likes and it may have to push them to amalgamate. We've had an occasion where it took 5 months for someone to finally go through the amalgamation even though they promised us to do it right away. But what's important there is that you have the security package that works at each stage of the transaction.

So with that I think I'll move over to questions and I've seen a couple that I can answer right off the bat. In terms of independent legal advice, and we're just going to take 2 minutes to answer some questions and I'm going to push some of them off to Pam and Mark, maybe, because some of them might be appropriate for them, in terms of independent legal advice, the question is can it be the same as the borrower's lawyer or does it have to be a separate lawyer? The answer to that is it's independent legal advice. The form for signing has the lawyer having to say that they are not engaged by the borrower, and they're not being paid by the borrower, so it truly does need to be a separate legal counsel. The separation here is that sometimes if you have 4 or 5 people asking for independent legal advice, sometimes banks will let one lawyer give independent legal advice to everyone who needs independent legal advice, rather than all of them having to get different lawyers. So sometimes there's a threshold where they say as long as it's not being paid by the borrower you can all use the same independent lawyer. Sometimes banks agree to that as a good enough threshold. There's a question about contaminated property and I know Pam's going to go into quite a bit of depth there so I encourage her to answer that question. In terms of the obligation of the landlord stepping into the shoes, that is a very good question. Obviously when a lender steps into the shoes of the landlord it generally steps into the shoes of wanting the privileges of the landlord but not the obligations. So on very important leases it's important to document that and I encourage Pam, you're dealing with real estate financing, I'd put that off to you as well to speak a little more in depth on that point. Then in terms of the GP and LP, in a limited partnership structure, it's the GP that gets the assets.

So with that, I think I will introduce Pam Green, who I've already mentioned before, and Mark Giavedoni who might be joining us in a couple of minutes. Both of them are very seasoned real estate professionals who, like I said at the outset, I trust on purchase transactions, on unique real estate registrations that are on title, and are regularly consulted on construction issues and they are a great team so I encourage you to reach out to them if you have a unique situation that's strongly related to real estate issues.