A condition precedent is an event that must occur before a contract can be fulfilled. Lenders will often require that borrowers provide certain documents and/or information (such as the company's constitutional documents or current financial information) before they will make funds available. This is the most common use of conditions precedent in finance transactions.
Why do banks insist on conditions precedent?
Conditions precedent are used to ensure that, before a borrower draws funds which a bank has agreed to make available, the legal and commercial assumptions which the bank has based its lending decisions on are satisfied.
Conditions precedent are also a means of safeguarding the funds put at risk by the lender. The conditions precedent will include all the necessary consents and approvals required to operate the borrower's business. These offer comfort on two levels: first, they confirm to the lender that the borrower is able to operate its business and finance the loan repayments. Secondly, in the event that the borrower defaults on the loan, the lender will know that it has all the necessary paperwork to continue the borrower's operations (whether by appointing an insolvency officeholder or selling the business to a third party) and repay the loan from the proceeds.
The conditions precedent clause
A facilities agreement - the agreement between the borrower and the lender which documents the loan facilities - will usually contain a conditions precedent clause. The conditions precedent themselves will then be listed in a schedule.
In the case of a syndicated loan – a loan made available by more than one bank, where an agent is appointed to coordinate matters – the agent will receive the conditions precedent and approve them on behalf of the syndicate.
Types of conditions precedent
A typical conditions precedent list will include:
- evidence of corporate authorisations and copies of the obligors' constitutional documents;
- most recent financial information;
- copies of relevant insurance policies;
- copies of any reports prepared by third parties;
- copies of the executed transaction documents, including security and intercreditor documents.
A borrower will want to make sure that the conditions precedent are precisely defined and objective so that it can satisfy them. The form of documentation required should be agreed wherever possible beforehand. Where third party reports are to be provided to the lender, the borrower should take steps to ensure that, as far as possible in advance, the third party is aware that it will need to provide its report to the lender and, if required by the lender, to readdress its report to the lender. Many lenders have a preferred form of wording for the addressing of reports.
The conditions precedent will usually be required to be "in form and substance satisfactory to the lender". If this wording is included the borrower should ensure that it obtains written confirmation from the lender when all the conditions are satisfied so there is no room for argument about whether or not the lender was satisfied with them.
Before a loan is made, the lender will usually require that:
- any representations and warranties given by the borrower are true and correct, and will remain so after the loan is made; and
- no event of default is outstanding or would result from making the loan.
Essentially, a lender will not advance funds in circumstances where the facility is already in default or will go into default as a result of that loan being made.
Where a condition precedent document needs to be certified, a duly authorised director or the company secretary of the borrower (or, if appropriate, the borrower's solicitors) should certify on the face of the document that it is "a true, correct and up to date copy" on the relevant date (that is, the date on which the loan is made).
Alternatively, the director or secretary of the company (in each case duly authorised) may issue a certificate listing and certifying a number of documents together. Copies of the documents should then be attached to the certificate.
If, for whatever reason, the date of closing slips, all the certifications will need to be updated. This is usually done by way of a formal reconfirmation where the certifying party amends each date and initials it. Alternatively, the lender may accept a letter from the certifying party confirming that no charges have occurred since the original certification date.
Confirmation of satisfaction
Lenders often require their legal advisers to provide a letter confirming that documentary conditions precedent have been received and that they comply with the requirements of the facilities agreement. This allows the lender to rely on its lawyers' inspection of the documentary conditions precedent.
Deferral of conditions precedent
If the lender decides to go ahead and lend money without all the relevant conditions precedent having been satisfied, the terms of the deferral should be written down in a conditions subsequent letter or a waiver letter. A conditions subsequent letter allows the outstanding conditions precedent to be satisfied at a later date, after the loan has been drawn. Failure to satisfy the conditions by the specified date is an event of default. Conditions subsequent can also be documented in the facilities agreement by inserting a new clause, but this can only be done if the facilities agreement has not yet been settled. Usually a separate letter will be the simpler option.
A waiver letter simply confirms that, notwithstanding the terms of the facilities agreement, the lender no longer requires the borrower to satisfy particular conditions precedent and so those conditions are waived. This can also be done by deleting the waived conditions from the schedule to the facilities agreement but again, this will depend on whether the facilities agreement has been settled.
In certain facilities agreements, conditions precedent will be required for each loan made under the facility. For example, a facilities agreement may be an umbrella agreement which entitles the borrower to draw funds for a number of property acquisitions. Each loan will therefore have its own conditions precedent (such as property information and reports) but there will be some "umbrella" conditions (such as the borrower's corporate information) which can be obtained as conditions precedent to the first loan and then need not be provided again.
Another example of ongoing conditions precedent is in the case of a property development facility, where funds are drawn against contractor's/agent's certifications (and certain other items), which must be provided ahead of each loan being drawn.