Loan Agreements: The Dark Side (Part III of III)
In Part I of this series we took a look at the contracting parties to a loan agreement and the commercial details of a loan. In Part 2, we looked at important loan terms like representations, warranties, undertakings, qualifications and exceptions. Now, we look into default provisions.
With the contracting parties’ focus on the commercial details and operational workability of the loan, they seldom spend time on default provisions.
This unconcerned attitude has caused many a lender and borrower to find their interests unprotected, and the lending relationship – in particular the existence of a default – to become the centrepiece of litigation.
Default provisions generally include a detailed list of events and circumstances which, when they occur, will constitute an event of default for purposes of the loan; and the remedies available to lenders in such instances.
Events of default
Events of default are included in loan agreements to allow the lender the right to re-evaluate the risk profile of the borrower and the loan, and should it wish, to take advantage of the remedies available under the loan agreement and in law.
The standard events of default required by lenders include:
It is important that events of default clauses strike a fair balance between the parties’ interests, for example to avoid the borrower being unable to optimally conduct its business fearing a premature repayment responsibility or the lender realising that its risk has become commercially or financially unviable.
When a borrower becomes aware that an event of default has occurred, it will usually be obliged to notify the lender of such event and provide information on the event and any steps taken to remedy the breach.
If an event of default occurs, a lender will have various remedies available to it, including the ability to, without any prejudice to any other rights it may have under applicable law:
Lenders must be mindful of grace periods that may apply before they will have the right to exercise their remedies.
When faced with a defaulting (or potentially defaulting) borrower, lenders should keep in mind that declaring an event of default and subsequently pursuing their contractual and legal rights in relation to such default may not be the only way forward. The parties can also negotiate:
Understanding these provisions of a loan agreement are therefore crucial for both borrowers and lenders in order to steer clear of the dangers that may lurk in the darkness of default.
Nadia has a BCom and LLB and was admitted as an attorney in 2006 after having completed her articles at Jan S De Villiers Attorneys (now Werksmans). Nadia then joined Freshfields Bruckhaus Deringer LLP in Amsterdam as an associate for 4 years before returning to ENS Africa as a senior associate in the banking and finance department. Nadia joined Caveat in 2015 focusing on corporate and finance law.