A money lender can charge a borrower a fee for entering into the loan agreement and lending money to the borrower. In addition, the parties will usually agree up-front who is to pay for all costs and expenses incurred by the parties in connection with entering into the loan agreement. If the lender has a strong bargaining position, then it is not unusual for the borrower to have to pay for all costs and expenses, even those incurred by the lender.
Given the borrower is probably not in a financially strong position (after all, it needs the loan), the borrower might need to use some of the money it borrows from the lender to pay the fee and also the costs and expenses. If this is the case, then the lender might offset the fee and costs and expenses from the principal amount being lent to the borrower so that the borrower only receives an amount equal to the principal less the fee and any costs and expenses. The lender will adopt this approach as it means there is no risk of the borrower not paying the fee or the costs and expenses.
The lender may want to charge the borrower a fee for agreeing to lend it the money under the loan agreement. If this is the case the loan agreement needs to set out clearly:
- When the fee is payable (i.e. is it payable on the date of the loan agreement, or on/prior to the date that the money is advanced to the borrower?);
- Is the fee a condition precedent to the lender advancing the money to the borrower;
- What is the amount of the fee (i.e. is it a set dollar amount or will it be calculated as a percentage of the principal being lent to the borrower?); and
- How must the fee be paid (i.e. by money transfer to the lender’s bank account or offset against the money being lent to the borrower?).
Both parties, but particularly the borrower, must be clear as to what the fee is and when and how it is to be paid to the lender.
Costs and Expenses
There are many costs and expenses involved in connection with entering into a loan agreement. These may include the following:
- Legal costs and expenses (of both the borrower’s lawyer and the lender’s lawyer) relating to the negotiation, preparation, execution, variation, replacement or termination of the loan agreement and the exercise or attempted exercise or the attempted preservation of any rights of the lender under the loan agreement; and
- Any tax, stamping and registration costs (including fines and penalties relating to such) which are payable in relation to the loan agreement.
The parties may decide that each party pays for its own costs and expenses (particularly legal costs) however, if the lender has a very strong bargaining position, it may expect the borrower to pay (or reimburse it for) its costs and expenses. If the borrower is to pay or reimburse the lender for its costs and expenses, then the borrower should ensure that the lender has to provide it with evidence of such costs.
Failure to pay
If the borrower fails to pay the fee and any of the lender’s costs and expenses, then it will likely be in breach of the loan agreement. This may give rise to remedies for breach of contract such as specific performance, damages and/or termination, where applicable.
In addition to the above remedies, if the borrower does not pay the fee or any costs and expenses of the lender, this will generally (and indeed you should make sure it does if you are the lender) constitute an event of default under the loan agreement. We discussed events of default in more detail in Part 6 (Events of Default) of this series but, 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.
There are many important clauses in a loan agreement. We have already explored most of them with you and will be looking at a few more next week. It is important for a borrower to review the fees and costs and expenses clauses in a loan agreement prior to signing to ensure there are not any costs they were not expecting and to make sure they can afford the loan.
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!