A loan can be committed or uncommitted. If a loan is uncommitted then, even after signing the loan agreement, the lender can decide (in its absolute discretion) whether or not to lend the loan amount to the borrower. If a loan is committed then, once the loan agreement has been signed by both parties, in theory the lender must lend the loan amount to the borrower. However, in practice, the lender will usually protect itself by insisting that various conditions are inserted in the loan agreement and, only once these conditions have been satisfied, does it have to advance the loan amount to the borrower. These conditions are known as conditions precedent or CPs as the lender will only advance the loan amount once they have been satisfied.
Conditions Precedent
The type and extent of the conditions precedent inserted in the loan agreement will depend on, for example, what the loan is for, the bargaining position of each party, whether the loan is secured or unsecured and how much the loan is for. If the borrower is low risk it will have a higher bargaining power as against the lender than a high risk borrower and therefore will generally not need to satisfy as many conditions. If the loan is to purchase an asset then the lender would want to see evidence that the borrower has legal title to the asset and has insured the asset (particularly if it has security over that asset).
Conditions precedent are split into two different categories: (a) documentary conditions (i.e. documents which the borrower must provide to the lender) and (b) non-documentary conditions (i.e. those which are matter of fact).
Documentary Conditions Precedent
Typical documentary conditions include the following:
- A copy of the certificate of incorporation and constitutional documents of the borrower (and any security provider and guarantor);
- evidence that all action required under the constitutional documents of the borrower (and any security provider and guarantor) in connection with its entry into the loan agreement (and any security documents and guarantees) has been duly taken;
- an original of the loan agreement (and any security documents and guarantee) executed and delivered by the borrower (and any security provider and guarantor expressed to be a party to it) and the money required by the lender to promptly stamp and register such documents (if required); and
- such opinions, valuations, certificates, solicitor’s certificates, legal opinions, notices, statutory declarations, undertakings, authorities to complete and other documents which the lender reasonably requests.
Non-Documentary Conditions Precedent
Typical non-documentary conditions include the following:
- the representations and warranties set out in the loan agreement are correct and not misleading as at the date on which the loan amount is advanced; and
- no Event of Default or potential Event of Default is continuing as at the date on which the loan amount is advanced.
Satisfaction of Conditions Precedent
The loan agreement will generally state that the borrower must use its best endeavours to satisfy the conditions precedent and they need to be completed in form and substance satisfactory to the lender (in its absolute discretion). Furthermore the lender usually has the discretion to waive conditions precedent (conditionally if it so chooses) giving it flexibility to advance the loan amount even where some of the conditions have not been satisfied, if it believes that doing so is low risk.
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 able to assist.