A-Z of banking and finance: C is for conditions precedent and conditions subsequent

A-Z of banking and finance: C is for conditions precedent and conditions subsequent

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What are conditions precedent (CPs)?  

These are conditions set out within a loan agreement that must be satisfied by a borrower before it can request drawdown of a loan and before a lender is obliged to lend.

CPs are a mechanism for the lender to ensure it obtains certain information and documents relating to both the borrower and the wider transaction before funds are made available to the borrower.

Whilst deal-type dependent, generally CP requirements can be extensive and it is important to collate and actively manage these throughout a deal, particularly where third party involvement is required so as to ensure CPs are satisfied in good time.

Where would you expect to see CPs?

Depending on form of loan agreement, these are usually contained within a schedule to the agreement. If the CP requirements are fairly short, they can be included within the body of the loan agreement itself.

In addition, a document commonly referred to as a “CP checklist” is a live document prepared by the party holding the pen on the loan agreement (usually the lender’s solicitors) which lists the CPs alongside which party is responsible for providing the same and the status of that CP.

As and when CP documents are produced by the borrower and/or their solicitor and the lender is satisfied with the same, the checklist should be updated and re-circulated accordingly. The checklist is a useful tool to monitor the progress of a transaction and should be updated frequently and accurately. 

What CPs do lenders typically require in a loan transaction?

Deal-specific conditions will vary depending on the type of transaction and purpose of a facility. For example, real estate finance conditions will differ to a receivables finance transaction.  However, customary conditions precedent for most deals include:

  • Signed loan agreement and security documents,
  • Corporate approvals where the borrower is a company, authorising its entry into the loan and security documents along with constitutional documents,
  • Financial information – for example, company financial statements and funds flow statements;
  • Insurance documents and
  • Any deeds of release in respect of any outgoing lender that is to be released/discharged.

What are conditions subsequent (CS)?  

These may be CPs which have not been satisfied in time for agreed drawdown and essentially mean that a lender will lend funds to a borrower on the basis that the CS is satisfied within a certain timeframe following drawdown.

Conditions which are agreed to follow as CS are largely subject to negotiation and lender agreement and a lender may require evidence that a borrower has taken steps to satisfy the CP prior to drawdown, with the formal documentation in respect of the same to follow after drawdown.

Failure to satisfy the CS within the agreed timeframe will usually trigger an event of default under the loan agreement and may give a lender the right to cancel a facility and/or declare all amounts owing by a borrower immediately repayable.

Where would you expect to see CS?

Similarly, depending on form of loan agreement, these are usually contained within a schedule to the agreement. 

Key take away

It is usual in any financing transaction for there to be a number of CPs that a borrower will need to satisfy before any funds can be requested or made available to them.

Whilst some CP documents can be readily provided to a lender, such as company constitutional documents, others, which may require third party involvement may take some time to be produced. Therefore, borrowers should consider the CPs at the outset of a deal and look to progress these as expeditiously as possible to avoid any delay in requesting drawdown of funds.

Just as importantly, any conditions which are agreed as CS should be produced to a lender in satisfactory form within the timeframe set out post-completion to avoid a potential or actual event of default under the loan agreement.

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