Loan documents are all the same right?

Not all lenders are transparent or scrupulous when it comes to their loan offers and the subsequent terms that they incorporate into their documentation.

For many of us, loan documents are long, technical and quite frankly, boring. It is very tempting to simply ‘skim’ over loan documents and sign them (and be locked in) without obtaining proper legal advice or consulting professional advisors. After all, time is money!

Why do I need a lawyer to help me with financing arrangements?

Did you know that some ‘Heads of Terms’ and ‘Offer Letters’ provided by financiers can be binding? Binding on you that is…but not the lender. Unfortunately, a lot of borrowers do not understand the intricacies of loan arrangements because they are complex, or simply because they have not read the documents.

In our experience, obtaining considered legal advice when you first start talking to banks could save you a lot of heartache (and money) in the long run.

So, what are the traps?

  • Beware of fees, fees, fees: Legal fees incurred by the lender are often payable regardless of whether the deal actually goes ahead. There can also be upfront fees, default fees, early repayment fees, and administration fees.
  • Relationships: Relationship Managers are there to ‘manage’ the relationship between the lender and the borrower, however their obligations and loyalties lie with the lender and not with the borrower. Everyone has ‘mates’ and borrowers often rely on their long standing relationship with their relationship manager or bank manager, but bank managers and relationship managers move jobs too and may not be available when needed. In addition, if there is a problem, your loan will in all likelihood become managed by the lender’s legal department. Therefore, relationship managers should be treated with the same respect as the representatives of all other suppliers to your business. Just because someone is in the business of supplying money it does not mean that they are any different from, or better than, any other contractor or supplier that you deal with.
  • Security: Security arrangements are not always how they seem. Some loan documents contain clauses which charge all assets owned by a borrower. All of a sudden, caveats may be lodged against all of your properties, and you may find yourself in default of other loan facilities that you have.
  • Guarantee: Guarantees can be complex. The parties providing guarantees for a loan should carefully consider their position after receiving independent legal advice and before signing.
  • Failing to ring fence financial arrangements: Ideally, borrowers should set up asset protection arrangements to separate their financial obligations. Failing to do so can cause unnecessary exposure to otherwise low-risk business ventures.
  • Conditions Precedent: Careful consideration must be given to the lender’s conditions. It is imperative for borrowers to understand presale requirements and what this might mean in terms of funding.
  • Structuring: Many borrowers spend thousands of dollars on structuring advice and asset protection strategies. All of this work can be undone with one ill-considered funding decision.
  • Mezzanine Finance: Second tier funding is becoming more popular, as it presents an opportunity for developers to free up their equity for other projects. However, mezzanine finance can add a further layer of complexity and risk to a project, and the relationship between the primary lender and the mezzanine funder should be carefully managed and documented from the outset.

What should you do?

Seek legal advice early! We have highly experienced lawyers who specialise in corporate structuring and financial transactions. We can help you understand the risks and obligations incurred in financial transactions and we can assist by liaising with lenders to negotiate the best protection for you and your business.

For more information contact the Finance team:

Christine Murray — Partner — Property Commercial Finance
(02) 6279 4402

John Morrissey — Senior Associate — Property Commercial Finance
(02) 6279 4439