- 30 Jan 2024
- 2 min read
Reservation of Rights Letters: What are they and why are they important?
Lenders have been reminded of the importance of their conduct if they wish to reserve any rights under a facility agreement following a breach by a borrower. Failure to respond to a breach in a way that is consistent with a lender’s rights could lead a court to decide that the rights have been involuntarily waived.
What are reservation of rights letters?
Where a borrower breaches a provision within a facility agreement, a reservation of rights letter can be used by the lender to delay enforcement of any rights they have arising from the breach.
When does a lender need to act?
In the common law, a lender has a period of time to consider the breach and decide the actions it wishes to take. However, if a notable period of time occurs before any action is taken, the court may determine that the non-defaulting party has waived the breach. The length of this period of time is determined by the courts, resulting in uncertainty for lenders.
Implications of Lombard North Central plc v European Skyjets Ltd
The case of Lombard North Central Plc v European Skyjets Ltd considered the various aspects of the doctrine of waiver, in particular the implications of clauses in facility agreements that state that no breaches can be waived without the express consent of the lender.
It was argued that Lombard (as lender), by giving Skyjets (as borrower) additional time to clear arrears and by accepting late payment, had waived its right to treat late payment as an event of default under a facility agreement entered into by both parties.
Lombard argued that repeated correspondence to Skyjets generally reserving its rights and the existence of a ‘no waiver’ clause in the loan agreement indicated that they had not waived their rights.
The court held that Lombard, by their conduct, had waived its right to rely on late payment as an event of default. The court particularly focused on how Lombard had offered Skyjets additional time to clear arrears, had accepted late payment, and had also charged a late payment fee. Collectively, the court determined that this conduct was enough to constitute a waiver.
How can a lender limit the risks?
Lenders should take the following steps to minimise the risk of a court determining that they have waived their rights following a breach of a facility agreement:
- Promptly providing the borrower with a reservation of rights letter without delay setting out the details of the breach and expressly reserving the lender’s rights in respect of it;
- Ensuring that their conduct remains consistent with the reservation of rights letter – charging default interest, for example, could indicate to the court that a waiver of other rights has taken place;
- Incorporating similar wording from the reservation of rights letter repeatedly within any correspondence to the borrower;
- Ensuring that their conduct closely reflects any ‘no waiver’ clauses in the facility agreement; and
- Carefully scoping any adjustments given to a borrower – concessions that are too broad may give the court a general impression that the lender is waiving the breach.
Our Banking and Finance team can assist in the drafting and review of reservation of rights letters, and can advise lenders on their conduct if they find themselves in a position where their borrower has breached.
If you wish to contact the team to discuss any of the above, please feel free to call 023 8032 1000 and ask to speak to a member of our Banking and Finance team.