Legal Practice Notes

Subordination Subordination is the reordering of claim priority against a debtor, whereby one creditor or a group (the junior creditor(s)) agrees that its debt will not be satisfied until liabilities owed to another creditor or group (the senior creditor(s)) have been paid. In effect, it changes the sequence in which creditors are repaid. This Practice Note explains: why subordination is adopted in particular finance transactions the two principal forms of subordination: contractual subordination, and structural subordination, and how insolvency affects subordination This Practice Note concentrates on the core principles for subordinating debt. Intercreditor agreements will typically address a broad range of matters, one of which is the subordination of junior debt. For fuller detail on how subordination provisions are included in, and drafted...

This Practice Note condenses the law, guidance and practical approach to executing simple contracts and deeds. It highlights the main distinctions between deeds and simple contracts, pinpoints those transactions that must be effected by deed, and outlines the execution formalities for both. It also covers the need for signature, use of counterparts, dating, smart legal contracts, virtual execution and electronic signatures. We have created a comprehensive, interactive collection to help users recognise and navigate the concepts and recurring issues that arise when executing documents. Each section or phase provides practical guidance, precedent-style clauses and Q& As relevant to that stage. For further information, see: Execution collection. Creating contracts A contract is a binding agreement that confers rights and imposes obligations on two or more parties. There is extensive case law on contract principles which is not examined in detail here. Put simply, for a...

A guarantee operates as a species of quasi-security (see Practice Note: Guarantees). Within commercial finance, guarantees frequently serve as a standard form of credit support in lending transactions and wider arrangements. For instance, where a company is the borrower, the lender may seek guarantees from its directors. More rarely, and typically at the smaller end of the commercial finance market, the lender may ask a closely related family member of a director—such as a spouse, civil partner, or parent—to act as guarantor for the borrower. When obtaining an individual’s guarantee, a number of additional matters arise beyond those encountered in the general law of guarantees. This Practice Note sets out the principal issues to address when taking an individual guarantee in a commercial financing context, namely: the capacity of individuals to grant guarantees undue...

Scope of this note Once security has been properly constituted, it is effective as between the security provider and the secured party. It is not, however, automatically binding on third parties such as a liquidator or an administrator of the security provider. In many situations, additional steps must be taken to perfect the security. Perfection is the process by which security is made enforceable against certain third parties (though not necessarily all). The term is sometimes used more widely to cover measures that improve or safeguard a creditor’s position, eg by securing a legal interest or ensuring the priority of its security. For information on the third parties that may not be bound by security that has been perfected, see The difference between perfection and priority below......

What does this Practice Note cover? This Practice Note outlines the participants involved in a Rule 144A (17 CFR § 230.144A)/ Regulation S debt issuance. Such offerings are typically intricate transactions featuring numerous parties, each with a vital function. Core participants encompass representatives of the issuer, one or more investment banks acting as initial purchasers of the securities (and carrying out an equivalent function for the Regulation S securities), a trustee/paying agent, and an independent audit firm, together with legal advisers to the issuer, the initial purchasers, and the trustee. In addition, others may participate on a more limited basis, including local counsel, The Depository Trust Company ( DTC), credit ratings agencies, printers, and regulators, among other parties. Each of these participants is considered in greater detail below in this Practice Note. Issuer The issuer is the entity that issues the securities being offered and sold. As the...

Construction projects frequently rely on a wide range of professional consultants, each undertaking distinct responsibilities. The size of the team varies with the project’s scale, and who makes the appointments will depend on the procurement route. Nevertheless, the principal consultants are broadly consistent across most schemes. This Practice Note outlines the roles of those key consultants and draws attention to their main duties. For a summary of the roles of the parties commonly involved in a construction project (including consultants as well as the employer, contractor and sub-contractor), see Practice Note: Parties in a construction project. For a visual of the contractual framework typical of a construction project, and how consultants are positioned within it, see: Structure of a development...

The principles of the notarial act are that it is: the notary’s own act, and expressly not that of the parties named in the document an official record of a fact, event, or transaction set out in documentary form, irrespective of the format adopted by the underlying document, fact, event, or transaction The notarial act serves to provide authentication by means of documentary evidence that will be accepted in the receiving jurisdiction where it is intended to be used......

In finance transactions, the expressions ‘netting’ and ‘set-off’ are often treated as if they are identical, although they are distinct concepts. The overlap arises because both netting and set-off can deliver the same economic result for the parties. This Practice Note outlines the distinction between netting and contractual set-off and indicates how netting is typically employed in commercial finance transactions. What is set-off? To grasp netting, it helps first to consider set-off, particularly contractual set-off. Set-off is the satisfaction of mutual monetary obligations, whereby one sum is discharged to the extent of the other. A right of set-off permits one party ( Y) to apply the amount owed to it by the other party ( X) against the amount it owes that other party ( X), allowing Y to reduce or eliminate its liability to X, e.g. contractual set-off arises where a right of set-off is...

This Practice Note outlines the duty of care owed by valuers and the scope of their potential liability to purchasers, vendors and mortgagees for erroneous valuations. It considers the permissible margin of error, the measure of damages, claimants’ contributory negligence, and efforts to exclude liability. It does not address a valuer’s liability when acting within an expert determination or an arbitration. For general guidance on arbitration and expert determination, see: Settlement and settling disputes for property disputes lawyers—overview. Duty of care A valuer appraises or determines the value of property, or sets a price for it. In performing that task, a valuer must exercise reasonable care and skill. This obligation is typically an express or implied term of the contractual retainer, but it also arises independently in the tort of negligence......

This Practice Note explains what constitutes an actionable misrepresentation, outlines the essential components for advancing a misrepresentation claim, highlights the function of the Misrepresentation Act 1967 ( MA 1967), and contrasts it with related causes of action, providing a comparison with other, similar claims. For connected guidance on the fundamental elements needed to found a misrepresentation claim, see Practice Notes: Misrepresentation—what statements will establish a claim? Misrepresentation—what is inducement? Misrepresentation—falsity (fraudulent, innocent or negligent misrepresentation) For an overview of practical issues in misrepresentation claims, set against negligent misstatement claims, see Practice Note: Claiming negligent misrepresentation or negligent misstatement—practical considerations. What is a claim for misrepresentation? A misrepresentation claim arises where one party to a contract (the representor) makes an untrue statement that leads the other party (the representee) to enter the contract. A claim can also be brought where the statement is made by an agent of a...

Introduction to margin loans What is a margin loan? At a high level, a margin loan is credit extended to a borrower, secured by liquid assets pledged for the lender’s benefit. The collateral usually consists of instruments traded on public markets or exchanges, most commonly the borrower’s listed shares, which serve as the underlying assets. The outstanding balance under the margin loan facility is compared with the value of those assets through a loan to value test. Should the collateral’s value drop beneath an agreed threshold, a margin call arises, obliging the borrower to act—typically by adding cash or further security—to return the loan to value ratio to the agreed level. Because asset values are set by exchange-traded prices, the loan to value can fluctuate rapidly and is therefore usually checked daily at the close of trading on the relevant exchange, when prices are...

In certain situations, a transaction will require particular obligations to be met after completion. These are known as ‘conditions subsequent’. This may stem from the terms of: the finance documents (e.g. where it was always intended that some lender-imposed requirements could only be met following completion), or a waiver or amendment letter (i.e. where specific conditions precedent were not met at completion and the lender agreed to waive them for a defined period) It is in the interests of both the lender(s) and the borrower to ensure that the conditions subsequent are satisfied within any timeframe set by the lender(s). Lawyers acting for the lender(s) The lender(s) will be keen to confirm that any conditions subsequent are discharged within the relevant deadline. The lawyers acting for the lender(s) should: review the finance documents to identify whether any conditions subsequent apply if there is a ......

This Practice Note looks at: the principal features of loan to value ( LTV) covenants in secured lending transactions possible issues with calling an event of default arising from a LTV covenant breach potential challenges to an event of default based on a LTV covenant breach remedying a LTV covenant breach the impact of the economy on LTV covenant breaches LTV covenants are a vital element of risk management in secured lending. An LTV covenant is a common financial covenant that requires the outstanding principal of a loan, expressed as a percentage of the value of the security charged in favour of a lender, to stay below a specified threshold for the life of the loan. This gives lenders a means to monitor and protect the strength of their security over time. For borrowers, grasping and...

This Practice Note outlines: what is meant by a loan transfer the key considerations when dealing with a loan transfer the principal ways to transfer a loan under English law transfer clauses found in loan agreements the borrower consent requirement the process and documentation required for a transfer overseas law issues What is meant by a loan transfer? A loan transfer is the passing by a lender of its rights—and frequently its obligations—under a loan agreement to another party. Those rights typically include the entitlement to repayment of principal and interest as set out in the facilities agreement. The lender will also hold other contractual rights, such as the ability to call for early repayment upon an event of default and to recover costs and expenses. The principal obligation that may need to move as well is the...

This Practice Note offers a primer on loan portfolio disposals, outlining the sorts of portfolios commonly marketed, who typically sells and buys them, and why. It also sketches a standard sale timeline. For guidance on issues that can arise, see Practice Note: Loan portfolio sales—key issues, and for the principal contractual suite, see Practice Note: Loan Portfolio Sales—legal documentation. What is a portfolio sale? A loan portfolio sale involves a lender transferring a bundle of loans rather than a single position, unlike a trade on the secondary loan market. The vendor may have originated or initially syndicated the loans, or may have purchased them secondarily from other investors. Following the 2008 global financial crisis, portfolio transactions became more visible (see ‘ Motivations of sellers’ below). Many regulated institutions, under political and regulatory scrutiny, sought to de‑leverage and strengthen regulatory capital ratios. Disposing of...

Conditions precedent In financing transactions, conditions precedent ( CPs) are the specific requirements that must be met before funding is made available under a facility agreement. They are usually not conditions for the agreement to take effect, but rather for lending to occur, although some facilities also include CPs to signing (the Loan Market Association leveraged facility being an example). CPs can equally feature in finance documents as conditions to the effectiveness of amendments or waivers, or for an accession. There are two types of conditions precedent: factual conditions precedent documentary conditions precedent Factual CPs are commonly included in the body of the facility agreement within the clause addressing conditions to utilisation. The borrower’s lawyers should confirm with the borrower that these factual CPs will be met immediately before drawdown. Such conditions are often linked to the...

Real estate finance ( REF) transactions Real estate finance arrangements fall into two categories: investment finance and development finance. The dividing line is whether the property is bought as an investment (that is, already producing income) or acquired for development. Although encountered less frequently, development finance is generally more complex than investment finance. For a broad primer on development facilities within real estate finance, see the following Practice Notes: Introduction to real estate finance—the lending structure Real estate finance—development facilities—key features The Loan Market Association ( LMA) has issued a recommended facility agreement for use in real estate finance development transactions, together with a user guide, both available to LMA members—see the Single Currency Term Facility Agreement for Real Estate Finance Single Property Development Transactions (the LMA REF Development Facility Agreement) and the accompanying user guide on the LMA website. As real estate finance...

This Practice Note sets out the concept of liquidated and ascertained damages ( LADs/ LDs) and their role within building contracts. It explains how these provisions function and why they are used. Distinguishes liquidated from general (unliquidated) damages; Reviews enforceability and common challenges, including penalty arguments; Addresses setting the LADs figure, caps, and the dangers of stating “nil” or “ N/ A”; Refers to case summaries in a related case law Practice Note. What are liquidated damages? Where parties to a construction contract agree LADs, they pre-determine a fixed sum payable if a specified breach occurs. These provisions are also known as liquidated and ascertained damages, with the acronyms “ LDs” and “ LADs” used interchangeably. When liability for LADs arises, the amount is usually payable by the contractor to the employer, or the employer may deduct it from sums...

Mandatory prepayment events Facility agreements very frequently oblige borrowers to repay, in whole or in part, the facility when specified particular triggers arise, commonly referred to as mandatory prepayment events. For an overview of the typical mandatory prepayment events, see Practice Note: Repayment, prepayment and cancellation. Historically, leveraged facilities agreements have set out a broader catalogue of mandatory prepayment events in comparison with an investment grade loan agreement......

Practice Note This Practice Note examines how the English courts approach the meaning and effect of a jurisdiction agreement (also referred to as a choice of court agreement) under English common law. It sets out the elements required for a valid jurisdiction agreement and the courts’ general method for construing these provisions. Matters addressed include whether a dispute falls within the clause’s ambit and how the jurisdiction promise interacts with the wider contract, covering separability and the position where the contract is alleged to be void or voidable. The Note also considers the courts’ approach to jurisdiction agreements contained in related contracts, as well as how conflicting jurisdiction provisions are handled. In addition, it reviews the use of jurisdiction clauses in an underlying contract for the purposes of settlement disputes, and the effect of an English law clause where no...