Default hurdles creep up
Lenders are adding to areas which trigger a loan default, says Louise Leaver, partner, head of finance, at Winckworth Sherwood
Should any regulatory action by the Tenant Services Authority be an event of default under your loan agreement? If common sense prevails, it would only be the more serious actions taken by a regulator that would allow your lenders to call a default. However, in recent months we have noticed that some lenders are attempting to widen the standard events of default and to adopt a belt, braces and full body armour type approach.
It has always been accepted that certain actions by the regulator such as appointing someone to conduct an inquiry or directing a registered provider to transfer land should be an event of default. From a lender’s point of view, the purpose of these events of default is to act as an early warning system of major mismanagement and concern about the financial viability of a borrower.
This gives the lender the ability to get round the table at the critical time to be part of any discussions with the borrower and the regulator. It should not be intended to trip the borrower up and put it into default for a minor or technical breach of the standards or because of day-to-day monitoring and regulation by the regulator.
However, we have noticed over recent months that lenders are now also including a general ‘sweeper’ clause as well as the specific provisions which are included in a loan agreement as standard.
Rather than identifying and relying on the specific actions which are of concern to a lender, they now include a general clause providing that if the TSA takes any regulatory action against the borrower under chapter 6 of the HRA 2008 or any enforcement action against the borrower under chapter 7 of the HRA 2008 that would be an event of default under the facility agreement.
However, there are numerous examples where action by the regulator under one of these provisions should not give a lender the ability to call an event of default.
For example, under section 219, the regulator may give an enforcement notice to a registered provider to resolve a specified failure or other problem. This could be a minor or technical breach (for example, failing to publish information when required) or it could be more serious (for example, as a result of mismanagement).
It should not automatically be an event of default under a loan agreement.
As a further example, the regulator could arrange for a survey of the condition of certain properties owned by the registered provider if it is concerned that the provider is not complying with the standards on the quality of accommodation or repairs. The regulator can also arrange for an inspection of a registered provider’s performance either in consultation with the Audit Commission or any other person.
Inspection vs inquiry
An inspection is part of the monitoring process and function and not the same as an inquiry, which can occur if a regulator is concerned about mismanagement and which may (if the findings are serious enough) trigger an event of default.
The use of the regulator’s powers to survey and inspect should not trigger an event of default under the facility agreement because this would be a fetter on the regulator’s ability to regulate.
The regulator has the power under section 227 in certain cases to impose a fine of up to £5,000 on a registered provider and while the circumstances may be serious and the amount may be onerous for some registered providers, it may not necessarily be an indication of serious problems.
Furthermore, a social landlord will receive a warning notice that the regulator is considering imposing a fine under section 230, and so it can then appeal the decision to impose a fine. However, if a general sweeper clause is included, the very fact of that warning notice being issued would trigger an event of default.
These general sweeper provisions should be strongly resisted by borrowers and at the very least must be qualified by materiality provisions. However, there is also a danger in introducing materiality into these types of clauses that it will increase uncertainty as to whether any particular action is an event of default or not.