Facility Agreement
Facility Agreement
Perth Commercial & Corporate Lawyers
A facility agreement is an agreement between the lender and the borrower setting out the terms of a loan, and the conditions under which when the borrower can access the funds under the facility. Facility loans are commonly provided by banks; however, private loans may be extended by private lenders. For private loans not regulated by the Banking Code, West Perth Legal assists with legal advisory, drafting, reviewing or negotiating loan legal documents including:
- Term sheet
- Facility Agreement
- Secured or unsecured loan agreement
- Registration of security interest such as caveat, mortgage registration, or property security registration
- Guarantee and Indemnity Deed
- Legal advice on loan default
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Facility Agreement
A facility agreement, sometimes also known as a loan agreement, is an agreement between a lender, borrower, and if required, its guarantor and security provider on the basis of which the borrower can access funds (drawdown) under the facility. Loans extended by banks are regulated by the Banking Code. However, private lenders such as friends, family members or private investors may also provide facility loans
In a facility loan, the parties usually begin with a term sheet, which sets out the key commercial and legal terms of the transaction. The term sheet is usually not binding (except for some issues such as confidentiality and costs). It gives the parties a good overview of the loan and basis to proceed. It is important for the parties to review the term sheet for legal issues as it can impact the cost of the loan.
After the term sheet is negotiated, the parties proceed to a written loan/facility agreement and security documents. A private facility loan comes in various types, including:
- Term loans
- Variable and fixed rate loans
- Capped interest rate loans
- Revolving credit facilities
- Secured loan
- Unsecured loan
The type of facility, the term, the interest rate, condition precedent for accessing funds varies for each case. Seek legal advice before you proceed.
Whether you are at the beginning of your lending journey, or you already have a facility agreement in place, West Perth Legal’s commercial lawyers can assist with negotiation, review or drafting of necessary legal documents.
Facility Agreement Key Issues
Usually, the facility agreement will address the conditions precedent before the borrower can apply to access the loan. The conditions should reflect the purpose of the loan and tailored to each case.
A loan with security is where the borrower pledges assets as collateral for the loan. An unsecured loan possesses higher risk for a lender, however, it can affect the interest rate charged. The collateral pledged can be real estate, equipment, stocks, or other valuable assets. Some security permits the lender to seize and sell the collateral to recover the owed amount. Some other methods prevent the transfer of ownership in property without the lender’s consent, and some requires a third party to guarantee a loan. These arrangements seek to reduce the lender's risk and can potentially allow the borrower to secure better loan terms. Our lawyers can assist with drafting security agreements, and registering a mortgage, caveat, PPSR or drafting personal guarantees to help secure a loan.
To protect lender’s interest, it may be appropriate to conduct due diligence on the borrower or required third party guarantee and indemnity. These are additional measures to help increase the chance of loan repayment.
The facility agreement should set out the interest rate details, including whether it will be variable, fixed or capped. It details how the interest rate is calculated and accrued. Any fees associated with the facility and the party responsible for the fee should also be listed, such as application fee, unused limit fees, legal fees, line fees etc.
It is common for the lender to require the borrower to agree to undertakings. For example, an undertaking to perform certain actions, or not to perform certain actions. The parties should consider if the parties can comply with the undertakings or if the undertakings will impact the operation of the business.
If the borrower defaults on the loan such as missing a repayment or repaying late, the parties should look to the loan agreement to resolve such issues. Typically, the loan agreement will include remedies such as interest on late repayment, it will address when default notices should be issued, or when rights over the security over an asset can be exercised. An indemnity provision is also helpful where the borrower agrees to indemnify the lender for costs associated with default by the borrower. Our lawyers can assist with interpreting your loan agreement, drafting default notices and help you exercise rights over secured assets.
Frequently Asked Questions
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