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Brexit - Are There Any Implications for Loan Agreements and Related Security?

Brexit - Are There Any Implications for Loan Agreements and Related Security?

In the event of a Brexit it is certain that things will change for banking in the UK, whether due to a change in regulation, capital adequacy requirements, a change in the amount or nature of competition from European banks or a lack of inward investors due to a different perspective on the UK market. Any such change would however hopefully be gradual and  have a minimal impact on borrowers who have outstanding loans.

However, the specific provisions of individual facility agreements will determine whether a Brexit would have a more immediate effect on Borrowers and it is worth considering some of the potential issues to allow any contingency plans to be considered at this stage.

Increased Costs Clause

Increased costs tie in with the lender’s capital adequacy requirements and deal with its obligations under Basel II and III amongst other things, usually making specific reference to the relevant EU regulation and directive. Given the nature of these provisions and the considerable negotiations and discussions which led to them being put in place, it seems likely that the relevant laws would continue to apply in the UK in at least the short to mid term and lenders would not incur an increased cost.

However if any increased cost is incurred as a result of a Brexit it would of course still be incumbent upon the Borrower to finance this in accordance with the relevant clause and it does not seem that lenders currently negotiating loan agreements would accept any shifting of the burden towards them.


Unless the UK joined the EEA following Brexit, Lenders based in the EU but outside the UK would lose their “single passport” in respect of the UK, as it allows them to provide banking services in other member states only. This could potentially result in them losing their ability to perform their obligations under the loan agreement and to continue as lenders. In these circumstances though transfer to another lender may be more palatable (certainly in syndicated facilities) than requiring immediate repayment, and it is the UK may well allow these lenders to continue operating in the UK with their single passport for a transitional period post any Brexit vote, until such time as alternative provisions and legislation could be introduced.

Material Adverse Change

The drafting of MAE clauses can vary from facility to facility but the standard drafting and common changes to make the provisions more borrower friendly are unlikely to result in an MAE being triggered by a Brexit. The question of whether there has been an MAE will depend on the facts at the time but lenders are sometimes reluctant to use MAE provisions to call an Event of Default and would find difficulty in doing so if they had been aware of the possibility of a Brexit at the time of entering into the Facility Agreement.


These would need to be reviewed on a case by case basis to ensure the obligors under a facility were still in a position to be able to make them post a Brexit. For instance, the position as to the governing law of the documents being enforceable in the jurisdiction of that Obligor’s incorporation, whilst unlikely to change in the short term, may have to be considered over the life of the facility depending on how the interaction between the laws of the UK and EU develops.

Enforcement of Judgements

Enforcement of court judgements of other EU states is permitted by the Brussels 1 Recast. If Brexit resulted in this legislation no longer applying in the UK the enforceability of judgements would depend on the law of the relevant member state in which you were seeking to enforce. Local advice would obviously be needed on this as it would vary from country to country and from facility to facility, but lenders with EU domiciled borrowers would need to consider their position.

Enforcement of Security

The ability to enforce fixed security granted under Scots law is unlikely to change post a Brexit as it creates a right in the property so secured and is enforced usually by purely Scots law processes which take place in Scotland.

However, the interaction of any such security with the rights of insolvency practitioners appointed or insolvency proceedings commenced in EU jurisdictions would need to be considered. And in the situation where an EU domiciled corporate entity has granted a Scots law bond and floating charge then the ability to appoint an administrator may potentially be restricted or extinguished.


At this stage it is not at all clear what the full implications of a Brexit would be, although in the short term it seems likely that the impact on existing facilities will be limited. However, Borrowers and Lenders should have regard to the specific provisions of the Facilities to which they are party and also keep an eye on mid to long term developments to try and head off problems before they arise.

We have examined various facts around the EU referendum process, links to which can be found here.  Over the coming weeks prior to 23 June, our specialists will be publishing further analysis of how their sectors may be affected if the UK votes to leave the EU, to help you understand the areas of uncertainty and assess the potential risks to your business.

Please do get in touch if you have any queries over how your business could be affected by the UK voting to leave the EU.

Allan Leal
Senior Associate