When committing to a third party, make sure your bank is committed to you

A recent article in The Secured Lender magazine titled “Avoiding Lender Liability Claims: When Words and Actions Matter” canvassed lender liability claims and the steps lenders should take to avoid being held liable in certain circumstances to a borrower, guarantor or third party. Many of the suggestions are similarly relevant to borrowers (as purchasers in an M&A transaction or otherwise) to ensure they are following best practices.

A liability claim often arises where a borrower believes a lender failed to honour an agreement to lend under a commitment letter or an oral commitment to extend credit. This can be particularly problematic where a borrower relies on the purported commitment from a lender to bind themselves to a further transaction – such as the acquisition of a business or even just the purchase of inventory or equipment. A failure by the lender to extend credit could result in a default by the borrower on its obligation to purchase.

The Statute of Frauds in force in many jurisdictions requires that a commitment to lend be in writing in order to be enforceable. While there may be circumstances in which a borrower may be able to avoid the requirements of the Statute of Frauds, best practice remains for a borrower to avoid committing themselves to an acquisition funded by credit until they have a written commitment from a lender to extend credit.

Even armed with a written and signed commitment letter or term sheet from a lender, a borrower should be cautious if such commitment is conditional on the execution of further or additional “definitive loan documentation” or a more formal agreement between the parties. Until such documentation is finalized, the lender may still be able to avoid any obligation to lend.

Finally, all documentation evidencing a commitment to lend should reflect all terms or “side agreements” which may have been agreed to orally. Most commitment letters will include “entire agreement” clauses, so any oral representation or agreement made by a lender in connection with the negotiation of the extension of credit will not be enforceable unless included in the written commitment.

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