Representations, covenants and events of defaults (the “Core Clauses”) are the foundations of loan agreements, and a number of these clauses are often found in a loan agreement. Unfortunately, their importance could be easily overlooked when drafting loan and other facility agreements. The drafters of such agreements may be tempted to take a shortcut and adapt templates and standards without first ensuring that each representation, covenant and event of default best serve the interests of their clients for the particular purpose(s).
Representations, covenants and events of defaults are the ABCs of loan agreements and parties may be easily caught out by one of their provisions if they are unaware of or do not understand the rights and obligations that stem from these clauses.
The Core Clauses are negotiable, and the specific wording used for the clauses depends on the negotiating power of the party. However, in order to comprehend what a party agrees to – either as a borrower or lender –the party must appreciate the marked differences between the Core Clauses and the different purposes they serve.
This article gives an overview of the Core Clauses in loan and other facility agreements. It also examines points to consider when negotiating representations, covenants and events of default, from the borrower and lender’s perspectives.