Many loan agreements contain an ‘events of default’ clause. This type of clause is designed to protect the lender from non-repayment of the loan and provide them with contractual rights under the loan agreement. As a borrower, events of default clauses can have significant financial consequences. Therefore, there are certain considerations to be aware of when entering into a contract with an events of default clause. This article will explore:
- what events of defaults are;
- how events of default protect the lender from non-repayment; and
- what you should be aware of when entering into an agreement containing an events of default clause.
What Is an Event of Default?
Events of default are usually serious events that indicate that you are experiencing financial or other difficulties and may not be able to repay a loan. These events will usually be listed in an event of default clause in your loan agreement.
Many loan agreements provide a period of time to allow you to correct your failure before it becomes an event of default. This is known as a grace period. The availability and length of the grace period may vary depending on the type of failure and its severity. Importantly, some events cannot be fixed once they occur.
How Do Events of Default Protect the Lender From Non-Repayment?
As a borrower, you may experience financial difficulties that prevent you from repaying your lender. The longer the lender waits for your repayment, the less likely they are to be able to get their money back. This is because more and more people may start seeking money from you if you are struggling to pay your debts.
However, an event of default protects a lender from non-repayment. Usually, a lender cannot ask you to repay a loan before the agreed loan period ends. However, if you commit an event of default, then the lender can do just that. Loans that are payable on demand may not have events of default clauses. This is because the lender can already ask for their money back any time they want.
Continue reading this article below the formWhat Are the Consequences of an Event of Default?
If an event of default occurs and you are unable to fix the issue within the grace period, then you will have defaulted under your loan agreement. This can have a number of serious consequences which your loan agreement will list.
What Should a Borrower Be Aware of Before Signing a Document Containing Events of Default?
It is unlikely that you will be able to negotiate the removal of an events of defaults clause completely from a loan contract. However, there are still several ways you can protect yourself as much as possible.
Review Any Clauses Which Will Trigger an Event of Default Carefully
It is important to review a loan contract carefully, especially any events of default clauses. This is to ensure that you can comply with the possible consequences if an event of default were to occur.
Ensure That Any Events of Default Are Events That You Can Control
It is important to ensure that any events of default clauses in your loan agreement are events that you can control. This will provide you with greater security and guarantees that the loan agreement is protecting your rights.
Ensure That You Have Sufficient Grace Periods
Having insufficient grace periods can cause serious financial repercussions if you were to make a mistake or fall into financial difficulties. Therefore, make sure that your contract has sufficient grace periods to fix your mistake or get back on track with your payments.
Check the Notice Provisions
Notice provisions can often cause borrowers to default under a loan agreement. Many grace periods begin from the time that your lender has sent a notice, not from when you receive the notice. Ideally, the notice period should begin at the time you receive the notice. This will prevent any unforeseen events to cause a default.
Key Takeaways
A lender will almost always require an events of default clause in a loan agreement. This is because these clauses are designed to protect them from non-payment. They do this by allowing the lender to recover the money as soon as you are facing financial difficulties. However, as a borrower, there are ways you can protect yourself. You should review the clause carefully to ensure that you understand what each event of default is and, if possible, that it is under your control. You should also ensure that the clause has a sufficient grace period. If you believe that an event of default has occurred, take action or seek legal advice as a matter of urgency. To find out more about loan agreements contact LegalVision’s banking and finance lawyers on 1300 544 755 or fill out the form on this page.
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