Home Loan Agreements are complex procedures with several provisions which must be considered. When the agreement is signed and the loan is sanctioned, both the lender and the borrower are in the same ship. We have listed four key terms to negotiate from a lender’s perspective.
- Events of Default:
Default is the main event against which the lender wishes to protect against. The borrower is generally given a grace period to cure the default. However, if the default remains uncured at the end of the grace period, it will become an event of default. The lender is entitled to certain rights in the event of default and these may come into effect immediately when the default occurs or when the default has been continuing for a period of time. The first creates rights in the favour of the lender, regardless of whether the borrower cures the default. The second would be more favourable for the borrower as they would get a certain grace period to remedy the default. Lenders should push for the former. If it becomes clear that the borrower is in financial trouble, then the lender should ask for the loan to be paid at the earliest.
Undertakings are specified actions which the borrower is required to do or is refrained from doing under the contract of the loan. These are referred to as positive undertakings or covenants (where the borrower is promising to engage in some action) or negative undertakings or covenants (where the borrower has promised to refrain from certain actions). These undertakings are aimed at minimising the likelihood that the borrowers risk profile is adversely affected. The borrower must make sure to abide by the promises and the lender must make sure that the undertakings are extensive so that the borrower does not do anything which would affect its risk profile.
- Fees, Cost and Expenses:
The lender may charge the borrower a fee for entering into the loan agreement and lending them money. The parties may also decide up-front who will bear the costs which would be levied on both parties for entering into the loan agreement. If the lender holds a strong bargaining position, it is not unusual for the borrower to bear all the additional costs.
- Representations and Warranties:
Whether the lender decides to enter into the loan agreement with the borrower, the lenders decision depends on their opinion about the borrowers statements. These statements are referred to as representations and warranties. These statements are made when the loan agreement is entered into. The agreement may also state that the representations and warranties are to be repeated on other dates during the term of the loan. This is strenuous on the borrower as this would mean the borrower must make sure that the representations and warranties do remain true. However, it is important for the lender to know that the information they based their decision on remains accurate.
There are many important clauses in the loan agreement and it is important for the lender to ensure that it is adequately protected and confident that they will get their money back before it enters into the agreement.