I was always told by my mother growing up not to use the "C-Word". Whilst she may not have been referring to a global pandemic, I will nevertheless abide by her rules. Let's discuss briefly loan payment deferrals and the value for both parties in putting pen to paper.
The five main Banks in Ireland have agreed a three-month suspension of mortgage and business loan repayments for borrowers that find themselves in financial distress. This has come as a welcome relief for borrowers although we are finding that there is no uniformity in the exact approach adopted by the State’s main Banks.
Each lender may provide loan repayment postponements, but the terms and conditions may differ greatly from borrower to borrower. Make no mistake also, the moratorium should not be misconstrued as a loan waiver or discount on the outstanding balance. It is therefore vitally important that the terms of any such agreement are reviewed in detail and are also documented by the parties.
The Devil's in the Detail
A prudent approach would be to place any repayment amendments in a simple side letter which will sit in neatly behind the principal loan agreement. The originals should be held with the principal loan pack.
The borrower should obtain independent advice prior to any such agreement. Interest most likely will continue to accrue on the outstanding portion of the term loan during the moratorium period, making the loan principal greater. Also, the loan tenure itself will most likely be extended which can have a knock-on effect on future cash-flow management. A small price to pay perhaps, but one that should only be exercised if necessary.
From a lender's perspective, documenting the agreement eradicates any ambiguity down the line and helps soften the administrative burden:
1- 6 months: Banks will face an immediate need to align repayment schedules, deal with accounting changes and provide for schedule and reporting changes in the short term; and
6 months +: Banks face a large chunk being wiped from their net profits this year and need to ensure that their house is in order when planning for the future. Be it from an investment or enforcement perspective, Banks will face scrutiny over the coming years. Having its paperwork prepared should be an absolute necessity.
When detailing any arrangements, the following should be taken into consideration and included in the side letter:
- Confirmation that any security will not be enforced during the moratorium;
- Waiving any relevant representations and/or covenants (for example those concerned with repayment);
- Details of any loan-to-value requirements that may be affected;
- Changes to any repayment schedules; and
- Clear setting out of any charges/fees for the stay as well as a time frame for the moratorium.
The side letter will act as an adjunct to the loan agreement and should be read in conjunction with it as it may in some cases permanently vary the loan documentation (e.g. fees, length of loan term, repayment amounts). As such, any providers of security or guarantees in respect of the loan should also be required to acknowledge and confirm that they are aware of the new arrangements and their security/guarantee extends to the loan as amended by the side letter and moratorium.
Taking it out of the Judge’s Hands
In the aftermath of the post-2008 economic downturn, some of the Banks were burnt badly in the Courts when seeking recourse for non-payment of loans which were the subject of moratorium agreements during the term of the loan. Some Courts sided with borrowers in debt, if their lenders failed to abide by the strict requirements of the consumer credit laws. Cases were struck out for many Banks’ failures to (a) provide true copies of all original loan agreements or (b) have the correct parties acknowledge the side agreement. In an enforcement scenario, if a lender fails to provide the requisite proofs of the debt outstanding (which can include accurate calculations of interest due and owing), a Court has the power to strike out a case in its entirety. It is imperative in this current environment that if Banks are offering deferrals on loan repayments or moving to interest-only agreements, that they are documented accurately, executed correctly by the necessary parties and stored with the original security pack.
“Right actions in the future are the best apologies for bad actions in the past”.
Leman Solicitors have extensive experience in dealing with a wide range of Banking and Finance law issues. Please do not hesitate to contact our colleagues John Hogan, Laura Holtham or Gavin Fitzgerald as each would be delighted to assist you in any way possible on 01 – 6393000.
Provisions include....a payment break up to three months, the deferment of court proceedings and the provision of working capital support to support businesses and personal customers.