Shields Legal’s Banking & Finance team counsels lenders and borrowers on preparing, delivering, and responding to notices of default and reservation of rights letters under financing agreements. When a default occurs under a financing agreement, an administrative agent or lender should act promptly to protect its interests, which often includes sending a notice identifying the default and reserving all rights. Depending on the circumstances, a notice of default may precede a forbearance agreement, the exercise of remedies, or a waiver with no further action. Following a default, financing agreements often permit lenders to impose default interest, suspend or terminate additional credit extensions, or repossess collateral. Lenders should draft notices carefully to comply with the relevant financing documents and applicable law, or they may risk potential liability or impairment of their rights.
Essential Components
A customary notice of default and reservation of rights letter typically includes the following key provisions:
- Use the notice address and delivery method required by the financing agreements
- Describe the facts and circumstances the default
- Identify the financing agreement provisions that were breached and constitute a default or event of default
- Specify any requested corrective or curative actions
- Include clear reservation of rights and non-waiver language
Notices
Notices must strictly comply with the financing agreements and relevant laws. Notices that fail to do so may be deemed ineffective and may lead to potential liability for lenders. Strict compliance requires reviewing the notice address (including titles, the exact address, contact details, and copy addresses) in the financing agreements and mirroring it in the notice. The delivery option must also conform to the financing agreements, whether that means by email, overnight courier service, or another specified method. In secured financings (whether the collateral is real estate or personal property), applicable law of the relevant jurisdiction will also have additional implications for the timing, sequence, and/or consents for notices.
Facts and Circumstances
The notice should describe the relevant facts and circumstances that caused the default. Often this is a missed or late payment or a breach of a representation or covenant. The description should generally include a date, time, required action that was not taken, or prohibited action that occurred. It may also state whether the default is continuing. The explanation should be detailed enough to make clear that a default has occurred.
Identify the Breach
The notice should specifically cite the section(s) of the financing agreement(s) that have been breached. Although many financing agreements permit remedies based on a single default, lenders are generally best served by identifying all known defaults to preserve and protect their rights.
Request Curative Action(s)
Lenders often send notices while they are continuing to determine the best course of action. If the parties have already discussed or negotiated the breach, the notice may also identify the actions needed to cure the default or otherwise satisfy the lenders. Certain defaults, such as failure to timely deliver financial statements, can be addressed by delivering those statements and then requesting a waiver. If the requisite curative actions are extensive, lenders should consider addressing them in a forbearance agreement.
Express Reservation of Rights and Non-Waiver Language
The notice should include express language confirming that the lenders have not waived the default(s) and reserving all rights and remedies under the financing agreements and applicable law. Similarly, lenders should consider including language making clear that the lenders’ delivery of a notice of default on this occasion does not entitled the borrower to future notices. The non-waiver language may also make clear that holding discussions and negotiations regarding amendments or waivers do not constitute a waiver of the lenders’ rights nor constitute an undertaking by the lenders to enter into any amendments or waivers.
Conclusion
Shields Legal regularly helps lender and borrower clients with drafting, delivering, administering, and responding to notices of default and waivers. While these are usually straightforward, they require careful attention to protect the rights of both lenders and borrowers when a default has occurred. Lenders should strictly follow the applicable agreements and applicable law to preserve their remedies and reduce risk. They should also actively monitor their credits because failure to send a proper notice may delay or prevent the exercise of remedies.
Note: This post is for informational purposes only and does not constitute or contain legal advice. Consult a licensed attorney in your jurisdiction regarding your specific situation.
