Pari Passu

[TerryJoe]

Jurisdiction

South America

Can someone please advise on what's happens in the scenario of three pari passu loans created on a piece of land all securing 1st charge on it.

The initial loans are such that two of the loans do not actually state interest on the 1st charge document but 1 of the charges does.

The situation is based on the original purchase value of land

Loan A = 70 percent value of land
Loan B = 20 percent of value of land
Loan C = 10 percent of value of land

If Loan C attracts 12 Percent Interest per annum and a period of 20 years has passed since the loans was provided and the land owning company goes bankrupt

Assuming the Land now sells after costs for half the original loan amounts not counting any interest, who gets what based on the law and guidance principles of Pari Passu

It would be usful of some guidance based on some past examples


Thanks

Terry

 

[flyingron]

We only do US law here. In the US liens and other security instruments have priority (almost always the date they were recorded).

 

[adjusterjack]

According to the definition of pari-passu, it seems to me that each lender would get a pro-rata share of the proceeds.

What Is Pari-Passu? (investopedia.com)

That, of course, depends on the terms and conditions of the loan contracts and the laws of whatever country where the property is located.

 

[Tax Counsel]

Can someone please advise on what's happens in the scenario of three pari passu loans created on a piece of land all securing 1st charge on it.

This site focuses only on law in the USA. But in general in the U.S. the principle of pari passu has limited application. Especially in real estate, where each property is considered unique, that principle is not applied to set limits or determine the rate of interest on mortgages. So long as the mortgage rate does not violate the state's usury law the courts will generally enforce whatever interest rate is stated in the contract. In the US one would be a fool not to state an interest rate in the loan agreement (among other things that can cause tax issues), but should that occur the courts will generally try to determine what the parties intended based on extrinsic evidence. In bankruptcy often the court will simply remove the property from the bankrupt estate and discharge the loan amount that exceeds the value of the real estate. The lender then can decide whether to foreclose the mortgage or let the loan continue as long as payments are being made. If the Court sells the property in a bankruptcy sale the property goes to the highest bidder and if that bidder needs to borrow the money to buy it, that buyer will arrange a new loan with whatever lender the bidder decides to go with. In short, in the US it would be rare, if ever, that the principle of pari passu would be used to alter the interest to be paid on a mortgage loan.