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When inspecting a draft loan agreement, you may not be familiar with many of its terms. One such term relates to the restrictions on transfers that enable the lender or the borrower to ‘transfer’ the loan to a third party. This article will explain how such a term might operate and what it means for your business.
Assigning Benefits
The critical thing to remember is that the law recognises a benefit in a contract as a piece of property. That is, the person that owns the benefit can give, sell, or grant security over the benefit.
A lender may wish to assign the benefit of your loan (i.e. your repayments) to another bank. For example, banks may offload certain loans due to regulatory requirements. Additionally, your credit rating may be too low to keep you on the books. Hence, the bank can transfer the risk of default by selling the benefit of your payments to a willing buyer. In any event, the lender can sell a third party the benefit of your principal and interest payments and fees.
Nevertheless, the circumstances under which the bank can do this are in the assignments and transfers section of a loan agreement.
Assignment and Transfer Terms
Before you sign the final agreement for a bank loan, the bank will present you with a draft loan agreement. One heading will contain some variation of ‘Assignment or Transfer’ and then a series of terms related to the borrower and lenders’ ability to assign or transfer the loan.
This section will usually contain several individual terms that govern:
- assignment and transfer by a lender;
- conditions of assignment;
- certain rights the lender has to grant security over the rights to a third party; and
- assignment and transfer by the borrower.
There is no practical distinction between assignments and transfer. Its practical meaning is usually that the bank has legally sold the benefit of the loan (i.e. your repayments) to the third party. However, assignments can also refer to where the borrower grants security over the benefit. In other words, to borrow money for itself. In practice, this has no bearing on you.
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What Happens to Contractual Obligations When a Benefit is Assigned?
If the bank transfers the benefit your business owes, you may wonder what happens to your obligation to pay the money. Where the lender has lawfully transferred the benefit of a loan to a third party, the original bank can serve you notice to direct payments to the new bank.
Unless you consent, any obligations the bank owes you still lie with that bank. That is to say, you can still enforce the loan agreement against the bank. However, if you consent to the transfer, the new bank now owes you obligations under the loan agreement. Nevertheless, you must direct repayments to the new bank.
Can a Borrower Assign the Benefit of a Loan?
A bilateral loan (i.e. a loan between you and another bank) will generally not allow you to transfer the benefit to another party unless certain conditions are met. These usually are limited to:
- you default under the terms of the loan; or
- the bank is transferring the benefit of the loan to another entity within the bank’s business.
On the other hand, if you obtain a syndicated loan where you borrow a single facility, but there are different lenders, then the lenders will usually reserve the right to assign the loan.
Key Takeaways
If your loan contains a term that allows the bank to ‘transfer’ the benefit of a loan, it can essentially transfer your obligation to pay back the loan to a third party. The bank will usually also give the other bank the security interest over your property. The effect is that you will now make payments to a new lender. However, any obligations the bank owes you, including making further funds available, do not leave the original bank. You can still enforce it against the bank. The exception is if you consent to a request to transfer the obligations. Most bilateral facilities do not allow the lender to transfer its benefit under the loan to a third party.
If you need help understanding your loan agreement, our experienced business lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. So call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A bank may reserve the right to transfer your obligation to pay the loan to another lender. The nature of this right will be spelled out in the loan agreement.
The only practical effect is that you will now make payments to the new bank. If you default, the new bank may be able to enforce the security against you. Nevertheless, the old bank is still obligated to honour any commitments it has made to you.
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