Loan agreements – an overview

A loan agreement (Loan Agreement) is a formal document under which one party (Lender) advances funds to another (Borrower), subject to the Borrower’s obligation to repay that money.  In any situation involving a loan, even between friendly or related parties, it is considered best to enter into a formal Loan Agreement to protect both the Lender’s and Borrower’s interests.

Loan Agreements range from the relatively straightforward to the exceedingly complex.

Common clauses in Loan Agreements

Most Loan Agreements will include clauses that:

• secure the funds advanced against the assets of the Borrower, usually by the granting of a security interest in favour of the Lender (PPSA Clauses);
• outline events which lead to the Early Repayment Amount becoming immediately due and payable (Events of Default);
• provide for a set Repayment Date on which the Borrower must make all payments owing to the Lender, in a manner prescribed by the Lender (Repayment of Secured Moneys); and
• set out representations, warranties and covenants made by the Borrower to the Lender (Representations, Warranties and Covenants).

As the arrangement between the parties increases in complexity, it is not uncommon for the Loan Agreement to also include clauses that:

• enable the advancing of further funds to the Borrower, on the same terms as the initial advance (Loan Facility); and
• provide a variable interest rate, that is triggered in the event that the Borrower defaults on their obligations (Payment of Interest).

Of course there are many other variations depending on the rights held by the Lender, the relationship between the Lender and Borrower, and the intention of both parties.

Common “pitfalls”

For parties entering into Loan Agreements there is much to consider.  The risks include, but are certainly not limited to:

• the Lender requiring a director, shareholder or beneficiary to provide a guarantee for the Borrower;
• the relationship between the Lender and Borrower giving rise to a presumption that the loan is in fact a gift;
• ambiguity in the Repayment of Secured Moneys clauses leading to a claim under the Loan Agreement becoming statute barred; and
• the Lender failing to register any security interest granted under the Loan Agreement on the Personal Property Securities Register within the required times.

Each situation will depend on the negotiating power of each respective party and the rights and obligations that they are able to negotiate.

Recent cases

Loan agreements between family members

Liakos v Zervos & Anor [2011] FamCA 547

• A father loaned his son $587,000 over a number of years.
• No formal Loan Agreement was written up until the son and his wife separated.
• The Court found the Loan Agreement to be unenforceable as the terms had never been enforced by the father. As such, the transaction constituted a gift, and the funds were able to be taken into consideration in the son’s divorce proceedings.

Loan agreements and oral agreements

Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55

• The Borrower argued that prior to entering into the written Loan Agreement, it had entered into an oral agreement with the Lender, the terms of which were inconsistent with the written Agreement.
• The Court held that the Borrower was bound by the written Agreement, and as such had defaulted on the repayments.

Further information about drafting or negotiating the terms of a Loan Agreement

If you need assistance drafting or negotiating the terms of a Loan Agreement, please contact us for a confidential and obligation free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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