Key Terms to Negotiate in a Loan Agreement – Borrower Perspective

Introduction

Loan Agreements are complex documents with many provisions to consider. Below we set out the five key terms to negotiate from a Borrower’s Perspective.

Events of Default

Following an event of default, the lender will usually have the following contractual rights:

• if the loan amount has not yet been lent, the lender is no longer obliged to lend the loan amount to the borrower;
• if the loan amount has already been lent, the lender can make the loan and any other money owing by the borrower to the lender under the loan agreement (for example any unpaid accrued interest and fees) immediately due for repayment; and
• if the loan is secured, the lender may enforce its security to ensure it is repaid in full for all monies owing by the borrower.

In addition to the above, if the event of default also constitutes a breach of contract or a misrepresentation, the Lender may also be able to make a claim against the borrower for any losses it incurs as a result of such breach or misrepresentation.

Due to the consequences of an event of default, the borrower needs to make sure it is satisfied that there is no chance of an event of default occurring. As such, the borrower should try to delete or amend any events of default that it knows it might breach. It should also negotiate grace periods (periods within which it is able to rectify an event of default without the lender being able to carry out its rights).

Undertakings

If the borrower does not comply with an undertaking then the normal remedies for breach of contract will apply (including specific performance, damages and/or termination, where applicable). In addition to these remedies, if the borrower does not comply with an undertaking, this will generally constitute an event of default under the loan agreement. If an event of default occurs and continues for an agreed period of time (the grace period), it means that the loan is immediately due and payable on demand by the lender and any security is enforceable.

Due to the consequences of non-compliance with an undertaking, the borrower should try to limit the undertakings it has to give under the loan agreement to reduce the likelihood of non-compliance.   If the borrower isn’t able to comply with an undertaking then it should ask for the undertaking to be deleted or amended before signing the loan agreement.

Representations and Warranties

A finding of misrepresentation allows for a remedy of rescission (intended to restore the parties to the position they were in prior to entering into the contract) and sometimes damages depending on the type of misrepresentation. Furthermore, if the representation is found to be a term of the contract then the normal remedies for breach of contract will apply (including specific performance, damages and/or termination, where applicable). In addition to these remedies, if the borrower makes a misrepresentation this will generally constitute an event of default under the loan agreement. If an event of default occurs, it means that the loan is immediately due and payable on demand by the lender and any security is enforceable.

Due to the consequences of misrepresentation the borrower should read each representation carefully and ensure it is correct. If representations are to be repeated, the borrower should also ensure that the representation will continue to be correct throughout the term of the loan. The representations should be limited are much as possible to reduce the possibility of misrepresentation. If a representation is not true or is likely that it will not be true at some point in the future then it should be deleted or amended before the borrower signs the loan agreement.

Fees, Costs and Expenses

The Lender may ask the borrower to pay fees in consideration for lending money to the borrower. The lender may also expect the borrower to pay for all of its costs and expenses (including legal fees) in relation to the loan agreement. Whether or not the borrower agrees to this will depend on its bargaining position. If the borrower is desperate for the loan and cannot get it from anyone else then it may have to agree. However the borrower could try to cap the amounts it has to pay so that it can be confident it will be able to meet the costs. Remember that if the borrower is unable to pay the fees or costs, it is likely to be an event of default, which is obviously to be avoided at all costs!

Conditions Precedent

The lender will only be obliged to advance the loan amount once the conditions precedent have been satisfied. Accordingly, the borrower may find itself in a situation where it has to pay a significant establishment fee to the lender but the lender does not have to advance the loan because the borrower is unable to satisfy the conditions precedent.

The borrower should try to limit the number of conditions precedent it has to satisfy. It should also make sure that it is able to satisfy all of the conditions precedent and that they are within its control. It should not be relying on third parties to ensure it can satisfy them.

Conclusion

There are many important clauses in a loan agreement. It is important for a borrower to review them all prior to signing to ensure they can comply with them. The consequences of non-compliance can be severe.

To find out more about loan agreements, or for any other finance law related matters, please contact us on 1300 544 755. One of our finance law specialists would be delighted to assist!