Reading time: 5 minutes

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.

For example, you could make a representation that you have full ownership over an asset which you have offered as collateral in a secured loan.

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.

For example, you could warrant that you will only spend the money you receive from the loan on items specified under the loan agreement.

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.

For instance, mutual representations and warranties may include that:

  • the parties are properly incorporated if they are a company;
  • the parties can enter into and perform their obligations under the loan agreement;
  • the loan agreement is valid and will bind both parties to its terms; and
  • the loan agreement does not violate any laws which apply to either party.

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. 

For instance, you may make a representation or warranty that:

  • you have provided accurate and truthful information in relation to the loan agreement;
  • there is no legal case in progress or pending against you that may impair your ability to repay the loan; and
  • you have not breached any conditions under the loan agreement.

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

For example, if you are entering a secured loan, you will have to back the agreement with some sort of asset as collateral. This security acts as a safeguard, allowing your lender to seize the asset if you are unable to repay the loan. This type of agreement will likely require specific representations that:

  • you have ownership over any assets which you have offered as security to the lender;
  • you have insured any assets that are subject to security; and
  • none of your assets forms part of another secured loan to a different lender.

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. 

For example, they could ask that you issue a statement or certificate that reaffirms the information you provided on each:

  • date you draw funds according to the loan agreement; 
  • interest payment date; or 
  • date during the 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.

Webinars

Redundancies and Restructuring: Understanding Your Employer Obligations

Thursday 7 July | 11:00 - 11:45am

Online
If you plan on making a role redundant, it is crucial that you understand your employer obligations. Our free webinar will explain.
Register Now

How to Sponsor Foreign Workers For Your Tech Business

Wednesday 13 July | 11:00 - 11:45am

Online
Need web3 talent for your tech business? Consider sponsoring workers from overseas. Join our free webinar to learn more.
Register Now

Advertising 101: Social Media, Influencers and the Law

Thursday 21 July | 11:00 - 11:45am

Online
Learn how to promote your business on social media without breaking the law. Register for our free webinar today.
Register Now

Structuring for Certainty in Uncertain Times

Tuesday 26 July | 12:00 - 12:45pm

Online
Learn how to structure to weather storm and ensure you can take advantage of the “green shoots” opportunities arising on the other side of a recession.
Register Now

Playing for the Prize: How to Run Trade Promotions

Thursday 28 July | 11:00 - 11:45am

Online
Running a promotion with a prize? Your business has specific trade promotion obligations. Join our free webinar to learn more.
Register Now

Web3 Essentials: Understanding SAFT Agreements

Tuesday 2 August | 11:00 - 11:45am

Online
Learn how SAFT Agreements can help your Web3 business when raising capital. Register today for our free webinar.
Register Now

Understanding Your Annual Franchise Update Obligations

Wednesday 3 August | 11:00 - 11:45am

Online
Franchisors must meet annual reporting obligations each October. Understand your legal requirements by registering for our free webinar today.
Register Now

Legal Essentials for Product Manufacturers

Thursday 11 August | 11:00 - 11:45am

Online
As a product manufacturer, do you know your legal obligations if there is a product recall? Join our free webinar to learn more.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Sam_Riggall
Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Innovation Award 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Award 2020 Employer of Choice Winner – Australasian Lawyer
  • 2020 Financial Times Award 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year Award 2021 Law Firm of the Year - Australasian Law Awards
  • 2022 Law Firm of the Year Winner 2022 Law Firm of the Year - Australasian Law Awards