Core Terms

General

If the loan agreement is prepared by legal advisers, it is more likely to be in the format of a general commercial document with the following broad structure:

  • Date, title, and parties;
  • Recitals;
  • Definitions;
  • Operative provisions;
  • Schedule;
  • Execution.

If the loan agreement is in the form of a facility letter, it will be by way of a letter addressed by the bank to the borrower. The letter will be signed by one or frequently two loan officers, with authority to bind the bank. There will follow after the bank’s signature an acceptance clause, by which the borrower may accept the facility. The facility letter will be sent in duplicate to the borrower, and one copy will be returned to the bank on acceptance.

In the case of a corporate borrower, a form of resolution by the directors accepting the loan should be attached. See the separate section on Corporate Facility Issues.


Structure

A loan agreement will generally contain clauses and provisions covering the following matters;

  • date;
  • parties;
  • interpretation;
  • facility amount;
  • availability;
  • interest;
  • the purpose of the loan;
  • security over borrower’s assets;
  • drawdown preconditions;
  • warranties and representations;
  • ongoing covenants and obligations;
  • events allowing termination of the loan;
  • fees and charges;
  • governing law;
  • the provision on data use;
  • provisions on assignment;
  • notices.

Date

The date will usually appear on the first page. Generally, written agreements become effective on the date they are signed by the last party. Alternatively, two identical counterparts, each signed by the other party, will suffice.

With a facility letter, the date on the offer page is the date of the offer. The date of the loan agreement is the date of the return of the signed acceptance


Parties

The credit institution party should be correctly specified.  A particular subsidiary of the credit institution may be the appropriate lender.  In some cases, the lender may enter as trustee for and on behalf of one or more entities within its group.

The correct borrower should be specified.  Many businesses are run through complex corporate structures.  The identity of the borrower is critical as its covenants back the loan.

If a guarantor is required, he or she should be party to the agreement.  Otherwise, he, she or it is not contractually bound to give the requisite guarantee.  A holding company guarantee may be appropriate where the borrower is a single purpose entity or is otherwise limited in its financial capacity to comply with the loan obligations.

Where there are multiple parties to the borrowing, it is presumed that they are jointly and severally liable for the loan obligations.  This legal presumption will usually be specified in the agreement.  Joint and several liability is more common and significantly more onerous than borrowing under an arrangement whereby the borrower is responsible for a fixed fraction only, of the debt.

With joint and several liability, the borrowers can be sued collectively or individually. Recovery may be had against any single borrower. Where one borrower has satisfied the debt in full, he may then have recourse to his co-borrowers under the Civil Liability Act or general legal principles.  He may be subrogated to the lender’s security provided he discharges the liability in full.


Facility

In this sense, the facility refers to the loan sum or amount.  There may be several distinct facilities within the loan agreement, each with a different purpose, terms, and conditions.  For example, the first facility may roll up or re-finance existing lending.  The second facility may represent new lending.  In some cases, there may be multiple facilities with distinct purposes and conditions as to availability.

Some facilities reflect the fact that the borrower need not necessarily agree to borrow money unconditionally.  The “facility” implies that the loan is available if the borrower wishes to use it, but that it is not obliged to borrow.

The fact of borrowing is generally vouched by reference to the bank’s records. The loan agreement usually provides that a certificate by an appropriate officer is presumptive proof of the borrowers’ obligations and loan amount.  In contrast, in many US and other jurisdictions, this would be insufficient proof and a separate instrument such as a promissory note, is executed.


Purpose of Loan

When loan monies are advanced, they become the absolute property of the borrower. Generally, the lender has no direct right to a fund of monies representing the loan proceeds or to any assets purchased with them. The lender has a general right to be repaid (i.e. the debt).  This is a contractual right to enforce the debt against the borrower personally.

There is a limited exception to this rule where a loan is advanced for a particular purpose. The courts have, in some cases, taken the view, that where monies are advanced for a very specific purpose, the lender may have an interest in the proceeds of the loan monies, even after they have been advanced to the borrower. The principle may prove to be of use in some circumstances.  Where the principle applies, the lender may be able to “trace” entitlement to another asset which has been purchased with the loan monies by way of a “Quistclose” trust.

The lender will wish to ensure that the monies are used for an approved purpose.  This may be for the purpose of acquisition of a particular capital asset.  There may be wide wording permitting for example that the facility be used for general corporate or business purposes.  If the borrower uses the facility other than for the permitted purpose, this will constitute a breach.

A Quistclose trust is named after a 1970 House of Lords case, Barclays –v- Quistclose Investments Limited [1970] AC 567.  In that case, a loan sum was advanced for a specified purpose but remained undrawn and unspent.  The House of Lords accepted that in such circumstances, the monies could be held on resulting trust for the bank.


Repayment

The period of the loan, the capital repayment requirements, and the interest rate basis will be key commercial terms. The loan agreement will set out specifically or by implication, the provisions for interest and repayment of capital.  There may be a schedule of payments of interest and capital by regular periodic payments.

Repayment may be due on a specific date or in accordance with a schedule of payments. Early prepayment may lead to broken funding costs. The bank may require an indemnity in respect of loss incurred. Repayment may be at a distinct point in time by way of a single “bullet” repayment. In many cases, repayment is on demand and is rolled over from time to time. This gives the lender considerable flexibility to demand repayment and terminate the facility.


Interest I

The loan agreement will specify the applicable interest rate. The bank may set a base rate with reference to its marginal or average cost of funds. It may set a floating rate based on a base rate, costs plus a margin. This base rate may be the bank’s marginal cost of funds on the interbank market.

The interest rate may be set by reference to some internal or external benchmark. In commercial loans, interest is more likely to be set by reference to the bank’s cost of funds on the interbank market or some equivalent benchmark.

Costs, which may be added to margins, usually refer to mandatory costs arising from the costs of regulatory deposits (if any). The margin will be set as a commercial term, depending on the borrower’s status and risk profile. The margin may equate to the bank’s profit on the loan.


Interest II

The rate of interest for Euro loans may be Euribor plus costs plus a margin. Euribor is the rate at which Euro interbank term deposits are offered by certain prime banks to other prime banks within the EMU zone. It is published at 11:00 a.m. (CET) on working days for spot value. The choice of banks quoted for Euribor is based on their market standing, and they are selected to ensure that the diversity of the euro money market is adequately reflected.

There may be provision for a higher default interest rate if the borrower fails to pay the sums due, when due. Provided that the default interest can be justified as reasonable compensation for having to deal with and the cost of the default, the clause should be upheld, at least in non-consumer loans.

Generally, there is no statutory restriction on the rate of interest that may be charged, if the borrower is not a consumer. Clauses allowing for the variation of interest rates are lawful subject to the provisions of Consumer Credit legislation.


Withholding Tax on Interest

Under some circumstances, there is an obligation on an individual or company paying interest to withhold tax. This can apply to cross-border payments.  There is often a clause in the loan agreement dealing with this possibility, which requires the payment to be “grossed up” (increased) so that the bank receives the required interest after tax is withheld.

The purpose is to protect the bank from withholding tax. The clause can substantially increase the cost to the borrower. Provision is made for any credit that may arise for the tax withheld. Companies are generally required to withhold tax on annual interest payments under Irish tax law. However, there are many important exceptions, which are almost always available to Irish banks and many overseas banks.


Security

The loan agreement will stipulate any security that is required. This may include real property, movable property and /or intangible assets. In the case of real property security, buildings insurance should be required. The lender should ideally be co-insured. Security over a life policy, a deposit or other assets may be required.

It is desirable for the lender to specify that the secured property is security for all sums due on all accounts between the borrower and lender. This means that the security will be available to cover shortfalls on other loan accounts.

Security is most commonly given over real property. Security may be granted over a range of other assets such as insurance policies, bank accounts, contracts and rents receivable may be required.  A company may more easily give security over its circulating trading assets by way of a floating charge which it may continue to use in the course of its trade, until enforcement.


Fees and Costs

Fees may be provided for by the loan agreement. There may be a front-end fee in consideration of the initial set up of the loan. There may be a commitment fee in relation to the commitment to make money available and to cover costs. The Consumer Credit Act restricts the charging of fees in consumer cases.

A loan agreement will usually require the borrower to pay incidental costs in connection with the setup and running of the loan.  This may include registration fees and other outlay. There is no stamp duty at present on mortgages or loan agreements.


Notices

The loan agreement should provide the requirements for the valid service of notices. There will usually be a number of alternative methods of service. Service may be deemed good, for example, if the notice is sent by post to the address in the loan agreement. Service may be deemed to occur one or two days later. Other options will usually be provided.


Waiver and Invalidity

It may be provided that the remedies and rights of the lender are not waived by any failure or delay in their exercise.  It may be expressed that the exercise of some rights is not to imply the exclusion or waiver of others.  It may state that rights may be exercised in whole or in part, as often as is necessary.

The purpose of the above type of provision is to prevent arguments as to variation and waivers of the loan agreement being made, where the bank forebears on enforcement but wishes to reserve its rights to do so later. The bank is likely to reserve its rights in any such negotiation expressly, but the declaration in the agreement is useful.

It is often provided that if any provision in the loan agreement is prohibited, unenforceable or void, that this is not to affect the validity of the remaining parts. This provision attempts to ensure severance insofar as possible at law where one aspect of the loan agreement is found unlawful or void.  The clause may not always be effective, as the principle of severance will only apply if the offending wording can be cleanly excised from the agreement.

It may state that rights may be exercised in whole or in part, as often as is necessary. The purpose of the above provisions is to prevent arguments as to variation and waivers of the loan agreement being made, where the lender forebears on enforcement but wishes to reserve its rights to do so later.


Law and Jurisdiction clauses

As with other commercial agreements, it should be specified which jurisdiction’s courts shall hear disputes and which jurisdiction’s laws will apply. There is broad freedom of contract in relation to this choice, other than in consumer cases.  Within the European Union, the matter is regulated by the Judgments Regulation and the Contractual Obligations (Rome Convention) Regulation.

The governing law of the loan agreement should specify the jurisdiction whose laws are to apply. The state whose courts are to have jurisdiction over disputes should also be specified. The loan agreement will be governed by the law of the country with which has the closest connection, in the absence of a specific clause otherwise.

In the case of a loan agreement in Ireland between an Irish bank and an Irish based borrower, the appropriate law to govern the loan agreements will usually be Irish law.


Data Protection Provisions

The Data Protection Act requires explicit consent to the use of personal data.  Loan agreements, particularly in the case of personal borrowers, will require consent to the process of personal data. They may require of or seek consents to the use of information for various purposes including, for example, notification to credit agencies, marketing of other products and other uses.


Assignments/Participation and Sub-Contracting

It is a fundamental principle that the burden of a contract cannot be assigned or hived off.  Sub-contracting of the burden of the contract is usually permitted. Sometimes it is provided specifically that the borrower cannot assign his rights, although this is not strictly necessary.

The benefit of a contract, such as the right to monies receivable under a loan agreement may be assigned under general law.  The lender commonly reserves the right to sell and assign its rights under the loan agreement. The “legal title” to the loans is not generally sold rights to the loans and security are transferred, commonly to an SPV which issues shares reflecting its assets. Securitisation involves the packaging of receivables into transferrable securities and is facilitated by legislation.

Sub-participation facilitates a lender in taking a loan off its balance sheet so that it no longer owns it. The participating bank agrees that the loan is serviced and repaid when the borrower services and repays the loan. The sub-participant takes the risk of the loan. The loan agreement may seek to facilitate sub-participation.  It does not usually have to be disclosed to the borrower. The principal bank will remain as a party to the loan agreement.

A feature of bank deleveraging has been the sale of large “packages” of loans and their associated security.  In these cases, both legal and equitable title to the loans is usually sold. Contractual clauses may facilitate loan sales. Ideally, the clause should specifically permit novation. Special legislation was considered desirable to facilitate loan transfers in the context of loan transfers to NAMA’s subsidiary NALM, and in the liquidation of IBRC, due to the absence of clauses permitting novation.


Defensive Clauses in Loan Agreements

Some loan agreements provide that the written agreement comprises the entire agreement. They may contain an acknowledgement that the borrower has not been advised by the lender and relies on his own skill and judgment exclusively, in entering the loan transaction.

The purpose is to prevent pre-contract statements or representations forming part of the contract or varying it.  It reduces the possibility of claims of side agreements, estoppel, and misrepresentations.

The above type of clause is unlikely to be effective where a statement has been made fraudulently. They may not hold good in the case of negligent misrepresentation unless the wording is very clear.  Even in the case of innocent misrepresentation, the courts may be prepared to engineer mechanisms to circumvent the provision, where its application would be unjust.


Execution

Execution clauses should be provided by which the borrower bind itself to the agreement by signature or by execution as a deed.  In the case of a company, a form of resolution conferring authority on named directors to accept may be incorporated, together with acceptance clauses by such directors on behalf of the company.


References and Sources

Irish Texts

Breslin Banking law + Supplement     3rd Ed  2013

Mortgages Law & Practice     Maddox 2nd Ed            2017

NAMA Act 2009: A Reference Guide Raghallaigh, Kennedy, Whelan

Money Laundering & Anti-Terrorist Financing Act 2010

Financial & Emergency Provision Legislation Annotated      2011

Shelley & McGrath     National Asset Management Agency Act Annotated 2011

Dodd & Carroll            Law Relating to NAMA 2012  0

Ashe & Reid    Anti-Money Laundering: Risks, Governance & Compliance             2013

Johnston & Ors           Arthur Cox Banking Law Handbook               2007

Dr Mary Donnelly  The Law of Credit and Security, 2nd Ed, 2015

UK Texts

A Hudson The Law of Finance 2nd Ed (Sweet and Maxwell 2013)

Veil (Ed) European capital markets law (Hart Publishing 2013)

IG MacNeil An Introduction to the Law on Financial Investment 2nd Ed ( Hart Publishing 2012)

E Ferran Principles of Corporate Finance 2nd Ed ( OUP 2014)

Gullifer (ed) Goode and Gullifer on legal problems of credit and security (6th edn Sweet and Maxwell London 2017).

MA Clarke et al (eds) Commercial Law: Text, Cases and Materials (5th edn OUP Oxford 2017)

McKendrick (ed) Goode on commercial law (5th edn Penguin London 2017)

G McCormack Secured credit under English and American law (CUP Cambridge 2004)

L Gullifer and J Payne Corporate Finance (2nd edn Hart Oxford 2015)

D Sheehan The Principles of Personal Property Law (2nd edn Hart Oxford 2017)

Ross Cranston, Emilios Avgouleas, Kristin van Zwieten, Christopher Hare, and Theodor van Sante Principles of Banking Law 3rd Ed 2018

E.P. Ellinger, E. Lomnicka, and C. Hare Ellinger’s Modern Banking Law 5th Ed 2011

Andrew Haynes The Law Relating to International Banking  Bloomsbury Professional 2009

Charles Proctor Mann on the Legal Aspect of Money 7th Ed 2012

Charles Proctor The Law and Practice of International Banking 2nd Ed  2015

Sheelagh McCracken The Banker’s Remedy of Set-Off   2010 Bloomsbury Professional

Louise Gullifer, Jennifer Payne Banking & Financial Law 2018

Hubert Picarda QC The Law Relating to Receivers, Managers and Administrators 4th Ed  2006 5th Ed 2019

Lightman & Moss on the Law of Administrators and Receivers of Companies 6th Ed  Sweet & Maxwell 2017

Timothy N Parsons  Lingard’s Bank Security Documents 6th Ed 2015