What is a Loan Consent Agreement?
A loan consent agreement is a legal contract between a borrower and a lender that provides consent for certain actions or changes during the term of a loan. This agreement is typically entered into when there is a desire or need to modify the terms of the existing loan agreement , such as when seeking approval for a transfer of ownership or change in management of the collateral or the company. The intent behind a loan consent agreement is to ensure that the lender approves of the proposed changes so that the borrower’s actions do not violate the terms of the original loan agreement. It is important as it not only protects the lender’s interest, but also helps avoid any potential legal issues that may arise from misunderstandings or violations regarding the terms of the original loan agreement.
Elements of a Loan Consent Agreement
Loan consent agreements are legal documents that come into effect when one lender of a secured loan allows another lender to become a party to a multi-lender credit facility. These documents are also used when the borrower of the first loan is attempting to replace the first lender with a second lender and needs the rest of the lenders to agree to the new terms set by the replacement lender. In the context of a post-closing purchase price adjustment mechanism, a loan consent agreement will be used to ensure that all of the lenders and parties to the credit facility/indenture/documents have signed the agreement, agreeing to the replacement of the first lender with the replacement lender on the conditions identified in the agreement. It is understood by all parties entering into the agreement that each will be bound by the terms and conditions contained within.
A loan consent agreement is a legal extension of a contract in which all of the parties involved agree to take certain prescribed actions as outlined in the terms and conditions of the agreement. The agreement will state exactly what actions are expected of each party, what changes have been made or accepted and also state the consequences of not adhering to the terms or any affiliated regulations. Upon entering this legally binding agreement, each party will now be under the legal obligation to complete the actions described in the terms and conditions of the agreement.
Legal Issues Surrounding Loan Consent Agreements
A lender that agrees to a loan consent agreement should be aware of the coercive aspects of the transaction. The lender is giving up a right(s) as part of the bargain. The consideration of the lender is more than pure dollars. It might be access to operations, information, expertise, etc. Those other terms are also valuable. The bank or financial institution might believe it is severing itself from some sort of liability. It may want to avoid entering into a long negotiation with the company or a third party concerning various rights. By entering into the loan consent agreement the bank or financial institution may be buying its way out of a lengthy negotiation and at the same time securing collateral that is going to gain in value over time.
The creditor should be mindful of the fact that it can bind itself to many issues of which it may not be aware. In the loan consent agreement, the lender may be making agreements about various other legal documents affecting the key real estate and related assets. The bank or financial institution is entering into a transaction that might affect the rights of unknown third parties. The bank or financial institution may be allocating responsibilities throughout an entire organization. It is important for the lender to carefully consider whether there are other pieces of paper that will be linked to the transaction. The lender should also consider whether the organizational structure of the borrower or the borrower’s affiliates means that the lender’s consent to one type of agreement might actually jeopardize its collateral position if a broad agreement is being made. The bank or financial institution should consider whether the loan consent is being entered into in order to benefit a particular related entity. There might be legal or practical issues that need to be understood about the relationship of individuals and their ownership interests. Consent agreements can generate a host of business and legal issues.
Advantages of a Loan Consent Agreement
The primary benefit of a consent loan agreement is that it will provide guidance as to how an existing or future loan transaction is expected to move forward. For example, a consent loan agreement may be incorporated into a new loan transaction to clarify the rights and responsibilities of lenders, to identify the priority of the secured indebtedness, and to establish how decisions will be made concerning the secured property. In the case of a loan refinance transaction, a consent loan agreement can provide the new lender with assurances as to how various obligations under the new loan are to be fulfilled, such as the ultimate satisfaction of prior indebtedness from loan proceeds or the possible release of specific encumbered properties if the lender’s obligations are timely performed.
The documentation of such understanding between the lenders becomes all the more important when multiple loans exist and each loan security will involve a separate priority level. A complex, multi-level financing transaction is best documented with the use of a consent loan agreement, and the use of a consent loan agreement is often the best practice. A consent loan agreement provides clarity as to how various lenders will react on a going-forward basis and the possible impact of two or more levels of secured indebtedness. Often, documentation of that clarity holistically as opposed to by the individual analysis of each lender’s rights is helpful in potentially avoiding disputes down the line.
Further, a consent loan agreement is a very practical tool to avoid litigation and promote compliance with federal and state bank regulations and the requirements of rating agencies. With regard to banks, the use of a consent loan agreement is frequently required to comply with a bank’s policy requiring subordination clauses to be approved by its board and with a bank regulator’s recommendation for loan subordination, which requires the bank to subordinate its position to another lender or to another secured creditor in a certain fashion (e.g., following other lenders, rather than subordinating the second level of debt to the first level in full). Typically, loan subordination for commercial real estate transactions varies from that of individual consumers and residential mortgage lending. Individual consumers are typically only a single borrower and a single loan level, while commercial real estate may have multiple loans, or various subordination levels, as well as various lien priority levels. Similarly, if the lender is a credit risk or involved in the securitization process, approval of the transaction by a rating agency may be required. Rating agencies default criteria often require that the lender’s right to the property be subordinate to other loans, bonds, or debentures. Likewise, compliance with regulatory guidelines is important. Each state and federal regulation presents unique challenges that affect the nature and enforcement of a consent loan.
Common Issues and Their Solutions
One common challenge in the context of loan consent agreements is ensuring that all parties involved are on the same page with respect to the obligations and restrictions outlined in the agreement. Disputes can arise if a party, such as the borrower or the lender, has a different interpretation of a specific clause. One way to deal with such issues is to establish a clear and concise framework for recourse before signing the loan consent agreement. For example, you could specify the mediation process that must be followed (and thus the time and cost involved) before proceeding to litigation, if necessary, or how to handle arbitration proceedings.
Another challenge can be the reluctance of one or more parties to sign the loan consent agreement, especially in cases where the existing collateral does not align with the new loan terms . For instance, if a parcel of land is being released from collateral on a loan, the borrower may worry that the release of collateral will impact the overall value of the collateral and, therefore, the overall loan risk profile. It is important, therefore, to negotiate and address these concerns with full transparency on both sides, and preferably to cement the agreement in writing.
Finally, the language of a loan consent agreement can sometimes be unnecessarily complex, causing confusion or misinterpretation at later stages. To avoid this, be sure to work with legal professionals who have experience drafting and negotiating loan consent agreements, and who are able to provide you with comprehensive guidance throughout the process and beyond.
How to Draft a Thorough Loan Consent Agreement
When going through the loan process with a comprehensive lifestyle portfolio, it’s essential to understand the role of various key legal documents. In the course of the underwriting and loan approval process, one of those documents that may be sought is a loan consent agreement, also known as a conflict of interest consent letter.
Drafting a comprehensive loan consent agreement requires a careful and thorough approach. Here are the general steps and best practices involved in creating an effective consent agreement:
Gather information: Collect all relevant details related to the situation, including the parties involved, the specific legal needs, and any existing contracts or agreements.
Consult legal counsel: Engage an experienced legal professional specializing in the relevant area of law to ensure that all legal requirements are met during the drafting process.
Identify specific needs: Work with the legal counsel to identify the specific needs of all parties involved in the loan process. This will help tailor the agreement to the particular situation.
Plan customization: Determine the degree of customization needed for the consent agreement. Be aware that different lenders may require different risks, terms, and conditions.
Address the key components: A comprehensive consent agreement should address several key components, including:
Be clear and concise: The language used in the loan consent agreement should be clear, concise, and free from ambiguity.
Negotiate and finalize: Engage in discussions with all parties until an agreement is reached. After all parties are satisfied with its terms, the consent agreement should be signed and dated by all parties.
Review and update regularly: It’s important to periodically review the consent agreement to ensure it remains current and applicable to any new circumstances or developments.
Ensuring a clear and unambiguous loan consent agreement can facilitate smoother loan processing and approval. Seeking the assistance of an experienced attorney specializing in business or corporate law will save you time, effort, and money in the long run.
Case Studies on the Use of Loan Consent Agreements
To illustrate the practical applications of loan consent agreements, consider the following scenarios:
A Seeking Relief from Guaranty.
Company A is a manufacturing company that has two divisions. Company B is a subsidiary of Company A that operates a manufacturing facility that processes food waste. Company A was having difficulty servicing the debt on its existing credit facility and sought to expand its existing credit facility with Wolfpack. The expansion allowed Company A to refinance its existing debt and obtain a new line of credit. However, Company A’s lenders required that the financing be supported by a guaranty from Company B. Company A’s lenders were aware of the liquidity constraints facing Company B and were willing to allow Company B to seek bankruptcy relief without triggering a default under the loan documents. Although Company A could have obtained the financing even if the lenders demanded a guaranty, Wolfpack was able to negotiate a loan consent agreement with Company B’s lenders that permitted Company B to grant a guaranty while also providing that an insolvency event would not trigger any payment obligations under the guaranty.
Lessons Learned from the Refinancing:
An Insolvency and the Loan Consent Agreement.
Company C , a waste hauler, financed its operations with cash flow and trade credit. When its largest customer filed for bankruptcy protection, Company C was unable to pay its debts. Creditors, eager to maximize their return on their debts, sought "lien stripping" remedies in bankruptcy and challenged Company C’s UCC-1 statements and secured status in various "avoidance actions." Company C’s lenders sued, seeking bank account freezes and full liquidations including underpayment for claims.
Fortunately, Company C had negotiated a loan consent agreement with its lender prior to filing for Chapter 11. The loan consent agreement approved the following:
Lessons Learned from Company C:
Case Studies are one of the most informative ways to understand complex legal issues. They illustrate the possible uses and outcomes of legal tools like the loan consent agreement. That’s what makes them such an important tool for commercial law.