Banking and Finance
Preparing loan agreements
The precise content of a commercial loan agreement will always depend on the particular
circumstances of the matter and the client’s instructions.
However, there are some issues which must be addressed in almost every loan agreement.
Loan advance
The loan money may be advanced by the lender:

in one single drawdown

progressively, in accordance with an agreed timetable, or

in multiple drawdowns at the request of the borrower – notice may be required prior to
each drawdown,
and usually for a particular purpose.
Repayment of principal
Repayment of principal (which is the money advanced) by the borrower may be:

at the end of a fixed term

in instalments over the term of the loan. (Often, the lender will include a schedule of
equal repayments of principal and interest over the term of the loan. The schedule will
show that as the principal is repaid the interest component of each repayment will
reduce as the principal component increases. This is referred to as amortising of the
loan.)

on the giving of a specified period of notice, or
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on demand.
Early repayment
A borrower may be permitted to repay all or part of the principal prior to the scheduled
date. If so, the loan agreement must set out whether the borrower will pay a cost for early
repayment.
Interest
The interest payable on the loan by the borrower may be:

calculated using a fixed or a variable interest rate

calculated daily, monthly, quarterly or annually

payable in advance or arrears, and/or

affected by certain events triggering a change in interest rate (such as early repayment).
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Security
The loan may specify that certain security must be provided for the loan by the borrower to
the lender, such as:

a real property mortgage over real estate, or

a security agreement over personal property – usually a specific security agreement
over a particular asset (or group of assets) of the borrower or a general security
agreement over all assets of the borrower (usually including all future acquired property).
The most common practice is to prepare a separate document creating the security. Both
the loan agreement and the security document will specify that a default by the borrower of a
provision of one of them is also a default under the other document. This is known as a cross
default provision.
A guarantee by a third party, such as a director of a company borrower, is another common
security. The guarantee may be unsecured or secured by assets of the guarantor.
Conditions
The loan may be made subject to the borrower:

performing (or not performing) certain acts

providing certain documents, or

applying the loan moneys for a specific purpose.
Conditions in commercial loan agreements are generally categorised as follows:

Conditions precedent to advancement of loan money – what the lender requires the
borrower to do before allowing it to drawdown the loan. The most common condition
precedent to drawdown of the loan is the borrower delivering to the lender duly executed
security documents in the required form.

Representations and warranties – promises and assurances that the lender requires
from the borrower about itself and information it has provided.

Undertakings from the borrower – what the borrower must do (or not do) during the
term of the loan. For example, this might include restrictions on the borrower’s right to
increase its indebtedness by borrowing more money or restrictions on the borrower’s
right to create any security interests or mortgages or charges over any of its assets.
Default provisions
The loan agreement needs to specify:

the circumstances that will constitute a default of the agreement generally known as,
events of default, and

the consequences of a default.
Often the borrower has a period of time in which to rectify a default before it becomes an
event of default; such as 14 days to make any payments due under the loan agreement. A
usual consequence of an event of default is that the outstanding principal sum and any
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accrued interest becomes payable immediately. The lender will also generally seek to
recover its costs of enforcing the loan agreement from the borrower.
Fees and costs
The loan agreement should set out any fees charged by the financier, such as loan
establishment fees, commitment fees, administration fees, and legal fees.
The loan agreement often provides that the borrower must pay the lender’s legal costs as
well as any stamp duty or other charges.
Boilerplate provisions
“Boilerplate” provisions are the standard provisions included in a contract, such as provisions
on “Interpretation” (generally found at the beginning of the document) and the following
(generally found at the end of the document):
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
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Notices
Waiver (also referred to as non-waiver)
Governing Law
Successors and Assignment
Severance
Entire Agreement, and
Variation.
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