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Loan Agreement Events of Default: Lenders' Remedies Toolkit
Practical Law Toolkit 2-577-1766 (Approx. 6 pages)
Loan Agreement Events of Default: Lenders' Remedies Toolkit
by Practical Law Finance
| Maintained • USA (National/Federal) |
Resources to assist counsel in understanding possible courses of actions that lenders may take when an event of default exists under a loan agreement.
A loan agreement typically includes an events of default section, which specifies certain events, circumstances or conditions that are considered breaches or violations of the loan agreement and the rights and remedies of the lenders if an event of default occurs. Generally, the lenders can exercise their contractual remedies under the loan documents, seek a court-ordered resolution or proceed under Article 9 of the Uniform Commercial Code (UCC).
However, declaring an event of default and pursuing contractual and legal remedies is not the only option available to lenders faced with a defaulting or troubled borrower. Instead, the parties may negotiate:
- A waiver, in which the lenders agree to waive the breach or event giving rise to the event of default.
- A forbearance agreement, in which the lenders agree not to declare an event of default with respect to the particular default or to exercise any remedies they may have under the loan agreement for a certain period of time subject to certain conditions (for example, no other events of default occurring).
- An amendment to the loan agreement, in which the lenders and borrower agree to revise a provision that may no longer be appropriate or accurate because of changing conditions (whether affecting the borrower specifically and/or the market generally) or to prevent the borrower from repeatedly breaching the same provision.
- An out-of-court restructuring of the defaulted loan, in which the borrower and the lenders typically renegotiate the loan agreement to restructure the terms of the borrower's debt.
Other remedies that lenders can consider if an event of default exists under a loan agreement are:
- Refusing to make further loans or issue additional letters of credit.
- Accelerating the borrower's loan repayment obligations.
- Requiring the borrower to cash collateralize undrawn and unexpired letters of credit.
- Suspending the borrower's SOFR interest rate option.
- Charging the borrower default rate interest.
- Exercising rights of set-off against deposits that the lenders hold for the borrower.
- For secured loans, exercising remedies contained in the security agreement or provided for in the UCC against the collateral.
- Taking legal action against the borrower and any guarantors of the loan, including by pursuing the borrower through the bankruptcy courts in some cases.
This Toolkit includes continuously maintained resources to provide information on:
- Events of default under loan agreements.
- The protection of lenders' rights when events of default are ongoing.
- Mechanisms to rectify events of default.
- Remedies that lenders can pursue when events of default exist.