What are the Consequences of an Event of Default?

Introduction

A default is the occurrence of an event which the lender seeks protection against. The borrower will generally be allowed a period of time (known as a grace period) in which to cure a default. If the default remains uncured at the end of the relevant grace period it will usually become an event of default. An event of default will create certain contractual rights for the lender under the loan agreement.

When do the Lender’s Rights arise?

The lender’s rights as a consequence of an event of default may arise either as soon as an event of default has occurred or if an event of default has occurred and is continuing. There is an important distinction to make here. The former creates rights in favour of the lender as soon as the event occurs, regardless of whether the borrower cures the default very quickly thereafter. The latter is more favourable to the borrower, as it gives the borrower an opportunity to remedy the default. Only if the default is continuing does the lender have rights.

What are the Lender’s Contractual Rights?

Following an event of default the lender will usually have the following contractual rights:

• if the loan amount has not yet been lent, the lender is no longer obliged to lend the loan amount to the borrower;
• if the loan amount has already been lent, the lender can make the loan and any other money owing by the borrower to the lender under the loan agreement (for example any unpaid accrued interest and fees) immediately due for repayment; and
• if the loan is secured, the lender may enforce its security to ensure it is repaid in full for all monies owing by the borrower.

What other Consequences may there be?

In addition to the above, if the event of default also constitutes a breach of contract or a misrepresentation, the Lender may also be able to make a claim against the borrower for any losses it incurs as a result of such breach or misrepresentation.

Conclusion

Loan agreements are very complex documents. If you require a Loan Agreement or have been provided with one and it contains provisions which you are unsure about, please get in touch with one of our specialised lawyers and they will be delighted to assist.