Seventh Circuit Upholds Yield Maintenance Prepayment Premium

In a closely watched case, the U.S. Court of Appeals for the Seventh Circuit, in River East Plaza, L.L.C. v. The Variable Annuity Life Insurance Company, recently reversed the U.S. District Court for the Northern District of Illinois and held that a "Treasury-flat" yield maintenance premium in a commercial mortgage was enforceable under Illinois law. A yield maintenance premium requires a borrower to pay the lender for the loss of interest that the lender will suffer as a result of a borrower's repaying the loan prior to its scheduled maturity date.

In River East, the borrower sought a mortgage loan to finance the purchase and development of a retail center. The lender agreed to make the loan on terms acceptable to the borrower. One of the terms included a prepayment clause that required the borrower to pay the lender a premium in the event that the borrower elected to repay the loan prior to the maturity date of the loan. Specifically, the note required that if the borrower prepaid