What are Representations and Warranties in a Loan Agreement?

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Table of Contents

• What Are Representations and Warranties?
• Repetition of Representations and Warranties 
• Consequences of Making a False Representation or Breaching a Warranty
• Key Takeaways

If you are entering into a loan agreement, you will usually need to provide detailed information to the lender. These statements can help to reassure them that the loan is low risk and that they will get their money back. To ensure the validity of this information, lenders may ask you to make several representations and warranties. These are statements that make you legally responsible for the truthfulness of the information you provide. You could face severe consequences if your statements are false. This article will explore the nature of representations and warranties and what might happen if a borrower makes a misleading or untruthful statement.

What Are Representations and Warranties?

Representations and warranties are factual statements that are given by one party to another in an agreement. 

Parties will generally make representations before they enter into a contract to convince the other party that the agreement will benefit them. It is a claim relating to past facts or existing circumstances that the lender relies on when entering the contract.

On the other hand, warranties are contained in the contract itself and intend to assure the lender that your statements are true. These terms are written in the agreement, meaning they will protect the lender if you breach a warranty.

Mutual Representations and Warranties

Most legal documents contain a few shared representations and warranties given by the parties. These usually reassure both you and the lender that you are legally bound by your statements.

Additional Representations and Warranties Made by Borrowers

In a loan agreement, however, you will generally have to provide further representations and warranties to the lender. The lender relies on these statements to determine the level of risk involved in lending you money. It is up to you to inform the lender if any of the statements are not true before entering into the loan agreement. 

Some loan agreements will contain representations and warranties specific to the circumstances of the loan. 

Repetition of Representations and Warranties 

You will need to provide representations and warranties on the date you enter into the loan agreement. This means that they must be true when you sign the contract. 

However, lenders often require you to repeat representations and warranties at other times over the loan term. 

You should be mindful of when you need to repeat the representations and warranties. This is because you must ensure that they are correct every time you are required to reaffirm them.

Consequences of Making a False Representation or Breaching a Warranty

In most loan agreements, making a false representation or breaching a warranty will trigger an event of default. This situation generally means that: 

• your loan will become immediately due for repayment; or
• the lender can enforce any security offered under a secured loan to ensure that they are fully repaid.

The consequences of a false representation also enable the lender to rescind the contract. Rescission means that: 

• your loan agreement will be cancelled;
• you and the lender must return to the position you were in before the loan.

In some instances, you may need to pay compensation to the lender in addition to or instead of rescinding the contract. This can be greater than the amount of money provided under the loan if the lender has suffered additional harm because of your misrepresentation. 

If a warranty is untrue, you will likely be required to pay damages to the lender. This resolution should restore the lender to the position they would have been in had the warranty been true. However, unlike misrepresentation, the contract will not be rescinded. 

Key Takeaways

You must ensure the representations and warranties you make in a loan agreement are correct before signing it. You should also be wary of any requirement to repeat those statements, as this is a difficult task. If a representation or warranty proves to be untrue on any date you give or repeat it, then you could face significant consequences. If you would like advice regarding your loan agreement, contact LegalVision’s banking and finance lawyers today on 1300 544 755 or fill out the form on this page.