Creating a Facility Agreement (UK)

06/09/2023

32 min

Note: Links to our free templates are at the bottom of this long guide.
Also note: This is not legal advice

Introduction

Creating a facility agreement can offer businesses a secure and efficient way to manage their finances. It is a legally binding contract between the lender and borrower which outlines the terms and conditions of the loan, such as the amount, interest rate, repayment schedule, and other details. With skilled legal expertise required to ensure that both parties are protected under such an agreement it is important to have an experienced lawyer review it before signing to ensure that all elements are fair and reasonable.

It is also crucial for those entering into facility agreements to consider the risks associated with taking on any loan; defaulting on obligations could lead to legal action from the lender or even repossession of assets by debt collectors - all of which need taking into account before signing. As well as outlining these general risks, lawyers should tailor agreements to suit unique circumstances of each business’s needs. This includes understanding both short-term commitments such as payment schedules and long-term ones like durations of loans or security arrangements – all in order to protect borrowers if they do unfortunately find themselves in breach at any point during or after proceedings.

When considering a facility agreement it’s easy for businesses who deem themselves ‘non-legal’ experts feel overwhelmed by complexity but here at tiktok��˰� we provide help every step along the way – no matter what skill level you may be at with regards understanding your rights when entering into a loan contract. With our template library being open source, millions of datapoints teach our AI what constitutes market-standard provisions so anyone can customize high quality agreements without requiring legal counsel - or even an account with us!
We understand that having clarifying information regarding rights easily accessible is vital when making decisions about contracts so read on below for our step-by-step guidance today about how you can access our free templates now!

Definitions

Governing law – The set of laws that applies to a particular situation, in this case a loan agreement.
Syndicated loan – A type of loan provided by multiple lenders.
Hedging strategies – Strategies used to manage the risk of a loan, such as interest rate swaps or currency hedging.
Collateral – Property or assets pledged by a borrower in order to secure a loan.
Guarantees – Promises made by an individual to ensure that a loan will be repaid in full.
Covenants – Conditions that must be met in order for a loan to remain in good standing.
Events of default – Events that trigger the lender’s right to demand immediate repayment of the loan.
Acceleration of payments – When a borrower fails to make the required payments on time, the lender may demand that the entire loan amount be repaid immediately.
Termination of the agreement – If the borrower fails to comply with the terms of the loan agreement, the lender may terminate the agreement and demand that the borrower pay back the remaining balance of the loan immediately.

Overview of facility agreement
Definition of facility agreement
Purpose of facility agreement
Key considerations when drafting and signing a facility agreement
Choice of governing law
Nature of lenders
Regulatory requirements
Types of facility agreements
Revolving credit facility
Term loan
Syndicated loan
Documentation and disclosure requirements
Financial statements
Credit ratings
Security documents
Negotiation and documentation of key terms
Interest rate
Repayment terms
Fees and costs
Covenants
Events of default
Rights and obligations of parties
Rights of lenders
Rights of borrower
Obligations of lenders
Payment of interest
Provision of funds
Risk management and security
Hedging strategies
Collateral
Guarantees
Enforcement of facility agreement
Acceleration of payments
Termination of the agreement
Enforcement of security interests
Regulatory considerations
Anti-money laundering requirements
Anti-bribery and corruption requirements
Regulatory filings
Dispute resolution
Negotiation
Mediation
Litigation
Tax implications of a facility agreement
Tax treatment of interest payments
Tax treatment of principal payments
Termination of the facility agreement
Voluntary termination
Involuntary termination
Consequences of termination

Get started

Overview of facility agreement

Understand the purpose of a facility agreement
Learn what a facility agreement is and what it is used for
Acquire the information you need to create a facility agreement
Be aware of the key elements of a facility agreement
Understand the legal aspects of a facility agreement
Be aware of the implications of a facility agreement

When you can check this off your list and move on to the next step:

When you have a thorough understanding of the purpose of a facility agreement, its key elements and legal aspects, and the implications of a facility agreement.

Definition of facility agreement

Understand the purpose of the facility agreement, which is to create an agreement between two parties regarding a loan or other financial arrangement
Identify the two parties involved in the agreement, which includes the lender (also known as the “creditor” or “provider”) and the borrower (also known as the “borrower”, “debtor”, or “customer”)
Establish the terms of the loan or other financial arrangement, including the amount of the loan, the repayment schedule, the interest rate, and any collateral that may be required
Clearly define the rights and obligations of both parties in the agreement
When you have completed the above steps, you have defined the facility agreement and you can move on to the next step.

Purpose of facility agreement

Understand the purpose of a facility agreement and why it may be needed
Identify the different types of facility agreements and the purpose of each
Determine the best facility agreement for the desired purpose
Assess the risks and benefits of the facility agreement
Checklist of action items to complete before drafting the facility agreement
Check that the facility agreement is compliant with applicable laws and regulations

Once you have a clear understanding of the purpose of a facility agreement, the different types of facility agreements, the best facility agreement for the desired purpose, assessed the risks and benefits of the facility agreement and checked a checklist of action items to complete before drafting the facility agreement, you can move on to the next step.

Key considerations when drafting and signing a facility agreement

Consider the parties involved and the purpose of the agreement
Think about the form of the agreement and the choice of governing law
Agree on the terms and conditions and the security which may be required
Consider the roles and responsibilities of the parties and what will happen in the event of a breach
Ensure that all parties are aware of their duties, obligations and liabilities
Set out a repayment schedule and the interest rate
Agree on any potential fees
Make sure to include a clause on events of default
Check the agreement for accuracy and have it signed by all parties

Once all the key considerations have been addressed and the agreement is signed by all parties, you can move on to the next step in the guide.

Choice of governing law

Consider the governing law of the facility agreement and the jurisdiction in which disputes would be litigated
Choose one of the approved governing laws: English law, Scottish law or Northern Irish law
Make sure that the governing law selected is properly incorporated into the document
Ensure that the governing law is suitable for all parties to the agreement
Once the governing law has been selected and agreed, you can move on to the next step: Nature of lenders

Nature of lenders

Identify the lenders that will be party to the Facility Agreement
Determine if the lenders will be a syndicate, or a single lender
Consider the type of lender, e.g. a bank, a financial institution, a private investor, etc.
Ensure the lenders are authorised to provide the services they will be providing
If the Facility Agreement covers a syndicate, consider if any of the lenders will be taking a lead role
Record all details of each lender in the Facility Agreement
When all details of the lenders have been included, you can move on to the next step: Regulatory Requirements.

Regulatory requirements

Read and understand the applicable financial services regulations
Ensure that the facility agreement is compliant with the regulations
Make sure to obtain the necessary permissions and consents
Be aware of any potential conflicts of interest
Check if the lenders need to be authorised
When you have checked off all of the above, you can move on to the next step.

Types of facility agreements

Understand the types of facility agreements available in the UK, such as term loan, revolving credit, overdraft, etc.
Determine which type of facility agreement is best suited to your business needs.
Consider the costs and benefits of each type before selecting one.
When you have selected the right type of facility agreement for your business, you can proceed to the next step.

Revolving credit facility

Review the terms and conditions of the revolving credit facility agreement
Check the interest rate and repayment period for the facility
Consider any fees and charges that may be imposed
Ensure that the facility is for an adequate amount
Check that any covenants set out in the agreement are achievable
Check that there are no security arrangements required
Examine any guarantees that may be provided by a third party
Ensure that any events of default are limited and clear
When all necessary changes have been made, sign and date the agreement
You can check this off your list when the agreement is signed by you and all parties involved.

Term loan

Define the term loan, including the amount and the purpose of the loan
Determine the repayment terms and the repayment schedule
Decide on the interest rate, and the conditions for any potential adjustments
Specify the collateral to secure the loan
Agree on the fees and costs associated with the loan
Outline the events of default and the consequences of default
Establish the governing law
Execute the Facility Agreement

You will know when you can check this off your list and move on to the next step when the Facility Agreement has been signed by both the lender and the borrower.

Syndicated loan

Understand the legal framework of a syndicated loan: Research loan agreement and applicable laws governing it.
Seek advice from an experienced lawyer to understand the implications of taking a syndicated loan.
Agree on the terms of the loan: Interest rate, repayment terms, security, covenants and other financial terms.
Draft a facility agreement outlining the terms of the loan.
Negotiate the terms of the loan with the lender.
Once all parties agree on the terms, sign the facility agreement.

Once you have completed the steps above you can check this off your list and move on to the next step, Documentation and disclosure requirements.

Documentation and disclosure requirements

Obtain from each lender copies of its standard facility agreement, disclosure letter and controlling lender letter
Ensure that the facility agreement does not contain any terms which are not acceptable to the borrower and its guarantors
Obtain copies of the borrower group’s last audited financial statements and the latest management accounts
Ensure that the borrower group is up-to-date with all filing requirements with Companies House
Ensure that the borrower group is up-to-date with all filing requirements with HMRC
Once all of the above requirements have been completed, this step can be checked off the list and the next step can be commenced.

Financial statements

Obtain the most recent audited financial statements of the facility agreement parties
Ensure that the financial statements are up to date and are in accordance with UK Generally Accepted Accounting Principles (UK GAAP)
Contact your accountant to review the financial statements and ensure they are accurate
Once the financial statements have been reviewed and are in order, you can move on to the next step of the process, which is to assess credit ratings.

Credit ratings

Contact the three major credit reporting agencies (Experian, Equifax, and TransUnion) to obtain a credit report on the company
Review the report to determine the company’s credit rating
Look for any discrepancies that could affect the company’s credit score
Make a note of the credit rating and any discrepancies to include in the agreement
Once you have the credit report and rating, you can move on to the next step of the guide, which is to prepare the security documents.

Security documents

Obtain the legal opinion from the company’s solicitors to confirm its corporate status, authority and capacity to enter into the agreement
Consider any security documents that may be necessary to secure the loan (e.g. charge over assets, share charge, fixed and floating charges, personal guarantees)
Agree the terms of the security documents with the company’s solicitors, the company and the lender
Review the security documents and confirm that the security package is adequate
Execute the security documents
Submit the executed security documents to the lender for registration

When all of the above steps have been completed, you can proceed to the next step - Negotiation and documentation of key terms.

Negotiation and documentation of key terms

Identify the key terms that need to be negotiated and documented, including:
The amount of the loan and repayment schedule
Interest rate
Security documents
Any other terms that are important to the parties
Negotiate the terms between the borrower and the lender
Prepare draft terms to be reviewed and agreed by both parties
Once the terms are agreed, prepare the final Facility Agreement, incorporating the agreed terms
Have the Facility Agreement reviewed by legal counsel
Execute the Facility Agreement and return it to the lender
You can check this off your list once the Facility Agreement has been executed and returned to the lender.

Interest rate

Calculate the interest rate that applies to the facility agreement.
Consider the legal framework for setting the interest rate and the borrower’s ability to pay.
Determine the type of interest rate, such as a fixed rate or variable rate.
Include the interest rate in the facility agreement.
Once the interest rate has been calculated and included in the facility agreement, it can be checked off your list and you can move on to the next step.

Repayment terms

Decide on a repayment plan and the terms of the repayment.
This should include any interest payments, how often they need to be paid and how the amount will be calculated.
Include a repayment schedule in the agreement, setting out when and how much is to be repaid.
Ensure that any additional costs, such as late payment fees, are laid out in the agreement.
To check off this step, make sure that all the repayment terms are clearly laid out and agreed to by both parties.

Fees and costs

Identify who is responsible for paying the fees and costs associated with the facility agreement
Specify what types of fees and costs are payable (e.g. legal, accounting, and other related costs)
Agree on who will pay the fees and costs associated with the facility agreement
Include any costs associated with the facility agreement such as stamp duty
Include details of any financial penalties for late payment of fees and costs
Specify who is responsible for paying the fees and costs in the event of a default
Specify the currency in which the fees and costs will be paid

Once these details have been agreed and included in the facility agreement, you can check this off your list and move on to the next step.

Covenants

Establish the covenants of the parties.
Covenants are the conditions in the agreement that each party must abide by.
Include provisions outlining the rights and obligations of each party.
Specify restrictions, such as prohibitions on the transfer of ownership and any limits on the use of the facility.
Make sure to include a clause that outlines the process for amendment or termination of the agreement.

When you have established the covenants of the parties, then you can check this off your list and move on to the next step.

Events of default

List the various events of default that would result in a breach of the agreement.
Set out the consequences for each event of default, including the obligation of the parties to provide notice of the event of default and the period for rectifying the breach.
Include an obligation for the parties to inform each other of any events of default that come to their attention.
Include a provision allowing the parties to waive any event of default without waiving their rights in the future.
Make sure all notices are in writing, and are sent to the address of each party.

Once you have listed out the events of default and their consequences, you can move on to the next step.

Rights and obligations of parties

Identify the parties to the Facility Agreement and set out their respective rights and obligations
Agree on the covenants each party is obliged to observe
Consider legal advice for any matters of interpretation
Draft the Facility Agreement, incorporating all the agreed terms
Ensure all parties sign and date the Facility Agreement
Check that the Facility Agreement is legally binding and enforceable
Once complete, the Facility Agreement should be stored in a safe place

You will know you can check this step off your list and move to the next step when the Facility Agreement has been signed and stored in a safe place.

Rights of lenders

Understand and research the rights of lenders as they pertain to the facility agreement
Identify the rights of lenders in the agreement and ensure they are included
Include the right of lenders to receive interest payments on the loan
Ensure the right of lenders to receive repayment of the loan is stated within the agreement
Make sure the right of lenders to charge a fee for the loan is included
Include the right of lenders to terminate the agreement if the borrower defaults
Check that the right of lenders to charge a penalty fee for late payments is included
Once all of the rights of lenders have been identified and included in the agreement, you can move on to the next step.

Rights of borrower

Understand that borrowers have the right to be informed of changes to the terms of the facility agreement
Know that borrowers have the right to be informed of any fees and expenses due
Be aware that borrowers have the right to access records of the facility agreement and associated documents
Make sure the borrower has the right to object to any proposed changes to the facility agreement

Once you have reviewed the rights of the borrower, you can move on to the next step, which is outlining the obligations of lenders.

Obligations of lenders

Lenders must not require any additional security or guarantees in respect of the facility agreement
Lenders must provide the facility in a timely manner and be available when the borrower requests it
Lenders must not demand repayment of the facility before the agreed term of the agreement
Lenders must not charge the borrower any fees or charges other than those stated in the agreement
Lenders must not modify or change the terms of the agreement without the borrower’s consent

You’ll know you can check this off your list and move on to the next step when you have reviewed all of the lenders’ obligations and confirmed that they are in line with the terms of the agreement.

Payment of interest

Interest will be paid by the borrower to the lenders at the rate specified in the agreement.
Interest will be payable annually, in arrears on the date specified in the agreement.
Interest payments will be calculated on a daily basis and will be paid in one lump sum, on the date specified in the agreement.
When all interest payments have been made, you can check this off the list and move on to the next step of the process, provision of funds.

Provision of funds

• Agree upon the amount of funds to be provided by each party
• Determine if the funds will be provided in one lump sum or in installments
• Include a clause that states the terms under which the funds are to be provided
• Specify the time frame in which the funds are to be provided
• Include a clause that outlines any restrictions or obligations placed on the use of the funds
• Decide who is responsible for any taxes or fees associated with the transfer of funds

When you have agreed upon the amount of funds to be provided, the terms of the provision, the time frame and any restrictions or obligations, you can check this off your list and move on to the next step of Risk Management and Security.

Risk management and security

Identify, analyse and manage the risks associated with the facility
Ensure that appropriate security is provided over the facility
Determine the scope of the security package required
Establish which assets should be included in the security package
Consider the form of security required and the legal formalities associated with it
Set out the details of the security package in the agreement
When all the requirements of this step have been met and included in the agreement, you can move on to the next step.

Hedging strategies

Understand the difference between forward contracts, futures contracts and other derivatives
Research the best hedging strategies for your particular agreement
Speak to a financial advisor to understand the risk/reward associated with each strategy
Consider the costs and benefits of each strategy before deciding on one
Speak to a lawyer to ensure the hedging strategy is legally sound
Make sure the hedging strategy is documented in the facility agreement
When you have chosen and documented the hedging strategy, you can move on to the next step: collateral.

Collateral

Determine what type of collateral will be used to secure the agreement.
Collateral can include, but is not limited to, property, cash, securities and other financial assets.
Determine the value of the collateral and agree on the amount of the collateral that each party must provide.
Document the collateral agreement in the Facility Agreement.
When the collateral agreement is documented, you can check off this step and move on to the next step, which is to agree on the guarantees.

Guarantees

Draft a section outlining the guarantees expected from each party to the agreement.
Include a clause that states that no party will be liable for any losses suffered by the other, except in circumstances where it has been explicitly agreed.
Ensure that all guarantees are in compliance with relevant regulations.
Make sure that the guarantees are appropriate for the specific agreement.
Make sure to include any other relevant guarantees in the agreement.

Once all the guarantees have been drafted and agreed upon, this step can be checked off the list and the enforcement of the facility agreement can be addressed.

Enforcement of facility agreement

Consider the various enforcement options available and the potential consequences of each:
Court action
Acceleration
Repossession
Termination
Suspension of contractual rights
Cross-default provisions
Decide which enforcement options are suitable for the agreement and include them in the document.
Ensure that the agreement is drafted in accordance with applicable legal requirements.
You can check this step off your list and move on to the next step once you have included all the suitable enforcement options in the agreement.

Acceleration of payments

Draft an acceleration clause that outlines the conditions under which the lender may demand repayment of the entire facility amount or any part of it
Include provision in the clause for the lender to give notice to the borrower of the demand for repayment
Ensure that the acceleration clause is enforceable and that the lender is able to enforce its rights under the facility agreement
Set out the process to be followed in the event that the borrower fails to make the payment demanded by the lender
When the clause is complete, you can move on to the next step of Terminating the Agreement.

Termination of the agreement

Specify in the agreement the circumstances under which the facility may be terminated, including the actions of either party that could result in a termination
Include a clause that outlines the consequences of a facility termination, such as any fees and costs that will be incurred
Specify a notice period in the agreement for the termination of the facility
Outline the procedure for transferring assets and liabilities associated with the facility when it is terminated
Once all the above points have been included in the agreement, you can move on to the next step of enforcing security interests.