LOAN AGREEMENT SOLICITORS
Loan agreements drafted or reviewed by our expert commercial lawyers.
Fixed fee loan agreements from £350 + VAT. Call 02477 981545
What terms go into a loan agreement?
If you are thinking of making a loan to someone, make sure that the terms of the agreement are in writing. As a very minimum, the agreement should set out the following:
• Amount being loaned
• Duration of the loan
• Interest rate to be applied
• Whether interest is paid at the end of the agreement or periodically throughout
• Default rate of interest (in event that the loan is not repaid on time)
• Governing Law
5 Common questions we often get asked about Loan Agreements
If you make a loan, how secure is it?
This depends on security offered as part of the deal and your risk/reward appetite.
There are different levels of security the parties can agree to and there will often be a mixture of securities offered as part of the deal. Essentially, they include:
Often this is the case between family members, where there are existing relationships of trust, but regardless of whether it is a family member, friend or any other person or entity, you need to understand that if the loan is not repaid for any reason, you risk not being paid at all, if the borrower does not have the assets to settle the debt. If you are lending large sums of money or an amount that you cannot afford to lose, you should really be looking at a securing the loan.
PERSONAL GUARANTEE (PG)
Let’s be clear as to what a personal guarantee actually is. This is where a third party guarantees the obligations of the borrower. In other words if the borrower fails to pay the loan, the guarantor becomes liable to pay.
Many people misunderstand this as they think that this guarantees repayment of the loan. This is not the case because the guarantor may not have sufficient assets or the Personal Guarantee may have been drafted to limit the extent of the liability, so the full amount of the loan is not recoverable.
Personal Guarantees are typically used when lending to a company, in which case the Directors of the company, will usually be asked to also give a Personal Guarantee, just in case the company defaults. This means that if the Company goes bust you can pursue the Director to pay the loan.
Do not be fooled into lending money to an individual on the basis that they will also offer you a personal guarantee because the borrower is already personally liable, so the PG adds no further protection. It’s only useful if the PG is from a third-party.
Lastly, just be aware that there is no central register of personal guarantees, so it could be that the borrower has given many PG’s which you may never know about!
TAKING A CHARGE OVER AN ASSET
Where the sums of money are significant, a lender will often want a charge over an asset. Charges come in many guises and there is a pecking order to consider in terms of seniority, with the holder of a first charge as the name suggests being first in the queue to be paid.
WHAT IS A CHARGE?
Essentially a charge is an agreement between the lender and the borrower that a particular asset of the borrower can be used in satisfaction of the debt owed to the lender by the borrower. The borrower has an interest in the charged property, giving the lender the right to have the proceeds of sale applied in satisfaction of the debt. This is commonly known as a fixed charge as it is fixed upon an identifiable asset of the borrower.
It does not give the Lender the right to take possession of the property, so the lender would need to apply to the court for what is known as an Order for Sale which gives the lender authority to sell the property on behalf of the owner/borrower, so the lender takes what is owed to them out of the proceeds of sale and gives anything left over back to the borrower.
This ensures that the lender gets their money back plus interest and costs incurred, if the borrower defaults.
A debenture is a document under which the borrower/security provider which is usually Company (it cannot be created by an individual) will grant security over all or substantially all of its assets by way of security for a loan, this is known as a floating charge but a debenture can also create fixed charges. While it is possible to describe in general terms which assets are subject to the security under a debenture, it will be a matter for negotiation between the parties as to which assets will be subject to the security and the type of security to be taken over a specific asset.
If the lender wishes to enforce a debenture, the main remedies that it may have available are as follows:
- The power to appoint an administrator.
- A power of sale without requiring permission of the court.
- A right to take possession of the charged assets.
- The debenture will generally contain enforcement provisions that govern how and when the lender can enforce its security.
Can a verbal loan agreement be enforced?
Yes, it can, however, it makes things much more difficult than if the agreement had been in writing. This is because you have to prove that the loan was actually made and upon what terms. The borrower could argue that the money was a gift or that there was no loan at all if the amount involved was paid in cash and there is no paper trail.
As part of any dispute, you would need to produce evidence such as: e-mails, text messages, bank statements, witness statements, look at the previous conduct of the parties and what the funds were used for. Ultimately, it may come down to your word against theirs, especially if the funds were paid in cash and there is no record of the transaction.
For the sake of saving yourself a few hundred pounds on legal fees. It really is worthwhile formalising the arrangement with a properly drafted loan agreement as this will help to minimise the likelihood of any dispute later on and will certainly save a lot more in legal fees in the event of a dispute, as the parties intentions will be clearly set out.
What type of due diligence can be done before lending money?
If you are lending money and want to ensure that you are repaid, you need to think of yourself as a bank and act as a bank would. This means undertaking Bank Grade Due Diligence. What follows is an outline of the measures that can be taken as part of that due diligence.
- Undertake I.D Checks against the individual or directors (if a company).
- Investigate how competent and experienced they are in what they are doing, what’s their business track record, do they have solicitors handling their side of the transaction.
- Carry out Company searches to check that the company has been created legally and check that the person you are dealing with is a named director, also look at the charges register to assess the extent of Company’s liabilities, and finally review the companies Articles of Association to see if the Directors have the power to take the loan, and whether approval is needed by shareholders.
- Carry out Bankruptcy searches against the directors
- Search the central register of winding up petitions
- Search insolvency register
- Review the borrower’s financial statements (assets and liabilities)
- Undertake due diligence on the security asset such as Land Registry searches, whether the asset is already being used as security in respect of another loan and have necessary consents been obtained in relation to this.
- If there is a PG in place, ensure that the guarantor has sufficient assets in place to satisfy the debt.
- Even something as basic as carrying out a Google search of the borrower by name and include “fraud” as part of the search to see if anything comes up!
What if I am unable to make the loan repayments?
Lending and borrowing money can be a risky business. Things do go wrong, even with the best of intentions. Most of the time these mishaps can be resolved between the parties.
Good communication often saves the day!
Get in touch with the lender and be up-front about the situation as soon as you become aware that you are unable to pay the installment/s. Silence breeds contempt, let alone the stress that is caused to the lender who will always assume the worst, i.e. they will never get paid! If the lender has been kept informed it is far more likely that an extension can be agreed.
Often, contracts can be varied by agreement, but communication is key. If you fail to communicate, enforcement is much more likely to happen. If you have given a PG (or someone else has given one) the lender can enforce against the guarantor and force them to sell personal assets in line with the PG.
If there is a charge on a property, the lender can apply for an order for sale to recover the debt. In addition to this the borrower will also be on the hook for default interest and legal costs.
What if the borrower goes bankrupt or goes into liquidation?
Whether you can recover your debt will depend on the nature of the security taken. There is a pecking order in which liabilities are settled when a Borrower goes bust, with HMRC trumping everyone. Thereafter preference is given to secured creditors down to unsecured creditors. At each stage of the pecking order, you will only get paid if there are sufficient assets, which is why due diligence is so important and you look towards getting the best possible security.
What happens if either party dies during the term of the loan agreement?
If the borrower dies, their estate becomes liable to pay the debt. How that debt is repaid, depends on the security offered under the agreement. So, for example, if there was no security and there turned out to be insufficient assets in the estate, then you are unlikely to recover all or some of the loan amount. Whereas if you had a first charge over a property then, you would have the right to enforce that charge to recover the debt (subject to their being sufficient equity in the charged property).
If the lender dies then usually the debt becomes an asset to be recovered by the deceased’s estate. Normally it is the duty of the appointed personal representatives of the lender’s estate to collect in the assets, but it is also possible to have a clause in the loan agreement which may allow the terms to continue, in the event of death, so that the borrower would simply continue making payments to the personal representatives, who would account to the beneficiaries for all payments made.
It is really important to obtain legal advice before you decide to lend money whether to a friend, family member or a business contact, to ensure that you have considered all the risks involved.
How long does it take for a Loan Agreement to be drafted?
This depends on the amount of work involved and complexity of the loan arrangement, but typically between 1-3 weeks.
How Much does a Loan Agreement Cost?
We can provide advice upon and draft a bespoke loan agreement for a fixed fee.
Our typical Loan Agreement charges are set out below:
Drafting loan agreement: From £350 to £1,000 plus VAT depending upon the complexity involved. Extra charges are applied for:
- For a straightforward loan agreement, we charge from £350 plus VAT. Where matters get more complicated, we charge up to £1,000 plus VAT. This might be the case with significant bespoke drafting requirements. In addition to the loan agreement we provide:
- Advice on security and due diligence against an individual from £150 plus VAT
- Drafting a legal charge (including land registry and Companies House registration requirements) from £250 plus VAT
- Drafting a debenture (including advice on Companies House filing requirements): from £250 plus VAT
- Drafting Personal Guarantee from £250 plus VAT
Please note that there may be small disbursements to pay in addition when registering documents at HM Land Registry or Companies House.
We also draft loan documents for SSAS trustees, in addition to sharia compliant loan agreements.
Depending upon what your requirements are, you could be looking at anything from £350 to around £2000 + VAT. A more bespoke quote will be provided once we have taken more details about the transaction, but this will give you a good idea of what to expect.
Make a FREE initial Loan Agreement enquiry
If you wish to discuss your particular situation with us regarding a loan transaction. Please get in touch for a FREE no-obligation chat on 02477 981545 email us on: [email protected] or complete our online contact form HERE>
It could end up saving you a lot of money, time and heartache in the future.
Joint venture agreements drafted with fixed fees by expert lawyers
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