Defaulting lender cure: Overview, definition, and example
What is a defaulting lender cure?
A defaulting lender cure refers to the actions or provisions outlined in a loan agreement that allow a lender who has failed to meet their obligations under the agreement (i.e., a "defaulting lender") to remedy or fix the default. In situations where a lender does not meet their obligations, such as failing to provide the agreed-upon funding or meet other financial commitments, a defaulting lender cure gives the lender the opportunity to correct the situation within a specified period.
This clause is often included in syndicated loan agreements or credit facilities where multiple lenders are involved. The purpose of the cure is to allow the defaulting lender to fulfill their commitments, thus preventing the other parties in the agreement from taking more drastic actions, such as declaring a default across the entire lending group or terminating the agreement.
Why is a defaulting lender cure important?
A defaulting lender cure is important because it provides a mechanism for resolving issues related to a lender's non-performance, without immediately triggering penalties or legal consequences for all parties involved. By including a cure period, the agreement allows the defaulting lender a chance to rectify the situation, preserving the overall functionality and integrity of the loan agreement.
For the borrower, this provision reduces the risk of disruption in their funding. For the other lenders in the agreement, the cure provision prevents them from having to take action that could affect the entire group, allowing the issue to be resolved without triggering a default across the entire lending syndicate.
Understanding defaulting lender cure through an example
Imagine a company enters into a syndicated loan agreement with several banks to secure funding for an expansion project. One of the banks, however, fails to provide its agreed-upon share of the funding within the required time frame. This triggers the defaulting lender cure provision, which allows the defaulting bank a specific period, such as 10 days, to remedy the situation and fulfill its commitment.
If the defaulting lender is unable to cure the default within the specified period, the agreement may outline steps for the remaining lenders to take action, such as replacing the defaulting lender or adjusting the terms of the loan.
In another example, a lender in a real estate financing deal fails to meet a payment obligation under the loan agreement. The agreement includes a defaulting lender cure clause, which gives the lender a 30-day period to make the payment and correct the default. If the lender cures the default within this time frame, no further action is taken, and the loan continues as agreed.
An example of a defaulting lender cure clause
Here’s how a defaulting lender cure clause might look in a loan agreement:
“In the event that a Lender (the 'Defaulting Lender') fails to perform its obligations under this Agreement, including failing to contribute its pro-rata share of the loan amount, such Defaulting Lender shall have a cure period of [Insert number of days] days from the notice of default to remedy the failure. If the Defaulting Lender does not cure the default within the specified cure period, the Borrower and the other Lenders may, at their discretion, take any necessary actions, including replacing the Defaulting Lender, adjusting the loan terms, or terminating the Defaulting Lender’s rights under the Agreement.”
Conclusion
A defaulting lender cure clause is a crucial provision in loan agreements, especially in syndicated loans, that provides the defaulting lender with an opportunity to remedy a failure to perform before more severe consequences arise. This provision helps ensure that the financing arrangement remains intact, reducing disruptions for the borrower and other lenders involved. It provides flexibility and clarity for managing defaults, ensuring the smooth continuation of the loan agreement, and preserving the interests of all parties involved.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.