One of the most important clauses in a loan agreement is the operative loan clause. This details when and how money is to be advanced by the lender to the borrower; the amount of money being advanced; and what (if any) conditions have to be satisfied prior to money being advanced.
The amount which the lender has agreed to lend to the borrower is usually referred to as the Principal. In the operative loan clause, the lender will agree to lend the Principal to the borrower.
The date on which the Principal is to be advanced by the lender to the borrower is often referred to as the Drawdown Date. There may be one Drawdown Date (if the Lender is going to lend all of the Principal to the borrower at once) or several Drawdown Dates (if the lender will lend the Principal in several instalments over a period of time).
If there is only one Drawdown Date, this is usually stated in the agreement. If there are to be several Drawdown Dates then usually the borrower will have to issue a notice (often referred to as a Drawdown Notice) to the lender a few days before it requires the next instalment. The form of the Drawdown Notice is usually agreed by the borrower and the lender before the loan agreement is signed and it is usually included as a schedule to the loan agreement. The borrower will need to include details such as how much it requires to borrow and on what date it requires the money.
If the loan is uncommitted then, even after signing the loan agreement, the lender can decide (in its absolute discretion) whether or not to lend the money to the borrower. If the loan is committed then, once the loan agreement has been signed by both parties, in theory the lender must lend the Principal to the borrower. However, in practice, the lender will usually protect itself by insisting that various conditions are inserted in the loan agreement and only once these conditions have been satisfied does it have to advance the Principal. The conditions are known as conditions precedent, as the lender will only advance the Principal once they have been satisfied.
The type and extent of the conditions precedent inserted in the loan agreement will depend on, for example, what the loan is for, the bargaining position of each party, whether the loan is secured or unsecured and how much the loan is for. If the borrower is low risk it will have a higher bargaining power as against the lender than a high risk borrower, and therefore will generally not need to satisfy as many conditions. If the loan is to purchase an asset, then the lender would want to see evidence that the borrower has legal title to the asset and has insured the asset (particularly if it has security over that asset).
Conditions precedent are split into two different categories: (a) documentary conditions (i.e. documents which the borrower must provide to the lender) and (b) non-documentary conditions (i.e. those which are matter of fact).
Typical documentary conditions include the following:
- copy of the certificate of incorporation and constitutional documents of the borrower (and any security provider and guarantor);
- evidence that all action required under the constitutional documents of the borrower (and any security provider and guarantor) in connection with its entry into the loan agreement (and any security documents and guarantee) has been duly taken;
- an original of the loan agreement (and any security documents and guarantee) executed and delivered by the borrower (and any security provider and guarantor expressed to be a party to it) and the money required by the lender to promptly stamp and register such documents (if required); and
- such opinions, valuations, certificates, solicitor’s certificates, legal opinions, notices, statutory declarations, undertakings, authorities to complete and other documents which the lender reasonably requests.
Typical non-documentary conditions include the following:
- the representations and warranties set out in this Agreement are correct and not misleading as at the/a Drawdown Date; and
- no Event of Default or potential Event of Default is continuing at the/a Drawdown Date.
The loan agreement will generally state that the borrower must use its best endeavours to satisfy the conditions precedent and they need to be completed in form and substance satisfactory to the lender (in its absolute discretion). Furthermore the lender usually has the discretion to waive conditions precedent (conditionally if it so chooses) given its flexibility to advance the Principal even where some of the conditions have not been satisfied, if it believes that doing so is low risk.
The loan agreement will generally state that the loan must be used for a particular purpose. If the money is not needed for that purpose then it should be repaid to the lender.
The reason for this is that the lender has agreed to lend money on the basis of a particular purpose (e.g. to purchase an asset, which it will have security over) and if the borrower uses it for something else (e.g. to repay an existing debt) then the risk profile of the loan is much higher. The purpose of the loan is also important for purposes of determining whether the National Credit Code applies to the loan agreement. For more on this please see our article entitled “Does the National Credit Code apply to my Loan Agreement?”
There are many important clauses in a loan agreement. We will be exploring some of the other clauses over the coming weeks.
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!