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Term Sheets and the Reimbursement of Due Diligence Costs

5.12.2016

In today's fast-paced lending environment, lenders often are required to order third-party reports and engage outside counsel prior to completing formal underwriting and issuing loan commitments. A non-binding term sheet is usually the basis of understanding at this point in time and, generally, neither the borrower nor the lender have any financial or legal obligation to each other (a discussion on the characteristics and differences between non-binding term sheets and commitment letters can be found by clicking here). As a result, the borrower has no legal responsibility to reimburse the lender for any third-party costs incurred by the lender should the proposed transaction not receive formal credit approval or should the borrower decide to walk away from the proposed transaction.

If circumstances require that third parties be engaged by a lender during the term sheet stage, a lender should either (1) add language to the term sheet in which the borrower agrees to be responsible for third-party costs and expenses of the lender (and countersign the term sheet) or (2) require that the borrower execute a cost reimbursement letter with terms similar to those contained in the below form.

 
While the letter to the left or a similar form of cost reimbursement letter can be used in many situations, a lender should consult with its legal counsel prior to utilizing any form to ensure that all lender and deal-specific requirements have been incorporated into the letter and to confirm that the letter is enforceable under the laws of its jurisdiction. (Click on the graphic to open a pdf of the full letter.) The attorneys in Poyner Spruill's Banking & Financial Services group have expertise in drafting and negotiating term sheets, cost reimbursement letters and commitment letters for all types of commercial lending transactions.

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