A crucial part of drafting any contract is making sure that you’ve worked through the “what ifs”—that you’ve addressed all conceivable scenarios and that nothing has fallen through the cracks. When you’re dealing with a complex transaction, accomplishing that requires specialized expertise and sufficient time and patience to wrestle with lengthy and and intricate documentation. It’s easy to overlook something and find yourself involved in very public unhappiness.
For a good example of that, I point you to this post by Steven M. Davidoff, the New York Times’s “Deal Professor,” on “The Battle for Stuyvesant Town.” Steven describes how the fate of a giant housing complex in lower Manhattan hinges on one provision in a contract. On one side of this dispute are two investment funds; on the other side are the senior lenders to the project.
I wouldn’t dream of attempting to boil down Steven’s account. Instead, I’ll just note that what caught my eye was the following:
So ultimately, as odd as it sounds the funds here may have the winning argument. But I think it is close. I say close, because this is most likely a fault in these documents themselves. In future intercreditor agreements, no doubt senior lenders will want to include provisions to prevent what is occurring here. In fact other intercreditor agreements are much more specific and do require that the senior loans be paid in full in all circumstances when the mezzanine lenders attempt to seize the equity collateral.
In other words, perhaps lawyers for the senior lenders might have done a better job policing the “what ifs.”
[Updated September 10, 2010: For D.C. Toedt's blog post explaining his approach to figuring out the "what ifs," click here.]