COVID-19 and the associated disruption to the economy is increasingly being considered as a valid circumstance to exercise material adverse change (MAC) clauses in commercial loan agreements.
A MAC clause in the context of a loan agreement provides lenders with contractual protection against factors which are unforeseen or outside of their control, adverse effects on their borrower's business and an unpredictable impact on the transaction and may provide a basis for a lender to refuse funding or to declare a default under a loan. As the article discusses, it is likely that we will begin to see many lenders seeking to safeguard their positions by utilising MAC clauses, particularly in property loan transactions, given the real estate sector has been one of the most affected by the pandemic.
Most interestingly, a lender's ability to protect themselves using a MAC clause is largely dependent upon the way in which the clause itself has been drafted, and how the loan documents operate in relation to the borrower's business and there is little case law in existence to help a lender assess if they will be successful in doing this. One of the most notable cases in this area, Grupo Hotelero Urvasco S.A. V Carey Value Added S.L. sets out a number of factors a court might take into consideration to determine if a lender can successfully rely upon a MAC clause. The basic interpretation of the clause itself will be considered, as will the degree of impact of the material change caused – in respect of COVID-19, the effects of the pandemic need to specifically affect a borrower's ability to perform its obligations under the loan agreement. Another factor taken into consideration is the how long the impact will be felt – the longer the change in circumstance has an effect, the greater the chances a lender has of successfully relying upon a MAC clause. It is thought already that the effects of COVID-19 are going to be felt for many months to come, and therefore it is likely that the protection provided under the MAC clause may warrant consideration. It is important to note however, that a degree of caution must be exercised by lenders, as the burden of proof lies with them, and incorrectly calling on the provisions in a MAC clause could not only result in damage to their reputation but also give rise to future claims against them.
As the article highlights, lenders and borrowers might use Covid-19 as an opportunity to renegotiate loan terms. MAC clauses should be reviewed carefully by both borrowers and lenders, with specific legal advice as to how COVID-19 may affect a particular lending transaction. We await the decisions of the court as to whether Covid-19 will constitute a valid circumstance to exercise MAC clauses.
See Lexology article here.