Ireland: Contractual Protection of Third Party Facility Agents

Introduction

On a syndicated lending transaction, the facility agent (the “Agent”) is responsible for the day to day running of the loan and provides a single point of contact for a borrower when it comes to requesting amendments, consents or even waivers. One of the financial institutions in the lending syndicate may perform the role of Agent or the club of lenders may appoint an independent third-party Agent (a “Third-Party Agent”) under the terms of the loan documentation.

In Ireland, larger real estate finance and leveraged facilities are, in most cases, documented under a loan agreement which follows the form (albeit heavily negotiated and tailored for the relevant transaction) of a Loan Market Association (LMA) loan agreement (the “LMA Loan Agreement”).

The LMA Loan Agreement provides that the Agent’s role is “solely mechanical and administrative in nature” and the English High Court,[1] whose decisions are not binding in Ireland, but have persuasive effect, has held that, whilst not purely a “postal service”, the role of Agent is limited in nature. Notwithstanding this, the Court in that case did state that any description of the role as “mechanical and administrative” must be read subject to the specific provisions in a loan agreement which impose duties and confer discretion.

It is therefore unsurprising, given the independence of the Third-Party Agent and the limited fees to be gained from the deal, that Third-Party Agents (who may well have separate legal advisors) will often seek to bolster the protections which are already found in the LMA Loan Agreement. In this Article, we look at some of the more common protections sought by these Third-Party Agents.

Discretion

To avoid any potential erosion of the mechanical and administrative nature of the role, Third-Party Agents often seek to limit the discretion offered to Agents under the terms of the LMA Loan Agreement. This is often sought by tweaking the drafting within the LMA Loan Agreement in several ways, including:

1. clarifying that conditions precedent are supplied to the Original Lenders / Lenders who are responsible for approving their satisfaction;
2. including clarification language which provides that, provisions requiring the consent / approval / direction of the Agent are deemed to refer to the consent / approval / direction of the Agent acting on the instruction of the Majority Lenders / Lenders / Instruction Group (as appropriate); and
3. including further clarification language which provides that, where a provision provides that an Agent must act reasonably, it shall be deemed to refer to the Agent acting on the instructions of the Majority Lenders / Lenders / Instructing Group who are acting reasonably. This provision may, in certain circumstances, go on to provide a confirmation from the Majority Lenders / Lenders / Instructing Group that they shall, in such circumstances, act reasonably.

However, it should be noted that an Agent will need to ensure that it retains some discretion. In certain instances, it is necessary for the Agent to act upon its own initiative (e.g. the amendment of its Agency Fee Letter) and the Agent will therefore need to ensure that in making amendments, its discretion hasn’t been overly fettered. In these instances, it may be necessary to clarify, in applicable provisions of the LMA Loan Agreement, and related Finance Documents, that the Agent is acting on its own initiative and not on the instructions of the Majority Lenders / Lenders / Instruction Group (as appropriate).

Implied Duties

When it comes to the role of the Agent, the LMA Loan Agreement provides that the Agent only has those duties, responsibilities and obligations expressly provided in the Finance Documents.  While the English Courts [2] have, in the past, refused to agree that certain obligations should be implied, Third-Party Agents will often seek to augment this particular provision by expressly providing that no other duties, responsibilities or obligations are to be implied.  Given that this position is consistent with the intent of the LMA Loan Agreement, this is rarely resisted.

Liability / Indemnities

Liability and the indemnities provided to the Agent will be a particular focus for Third-Party Agents. In terms of an Agent’s liability, Third-Party Agents will seek to make a variety of tweaks to the LMA Loan Agreement to, for example:

1. clarify that they will not be responsible for taking or not taking any action on the instruction of the Majority Lenders / Lenders / Instruction Group (as appropriate) or while waiting for instruction from the Majority Lenders / Lenders / Instruction Group (as appropriate);
2. exclude liability when acting under power of attorney granted pursuant to the Finance Documents; and
3. in the context of a development financing, exclude liability for any acts or omissions or breach by a counterparty when stepping into that counterparty’s shoes under a development document.

With respect to indemnities, Third-Party Agents often seek to broaden the indemnities provided by the Lenders and the Borrowers to include, for instance, extension of the indemnities to the Agent when acting as attorney under a power of attorney granted pursuant to the Finance Documents. Survival clauses are also often sought, whereby the indemnity provisions are said to survive the resignation of the Agent or the termination of the relevant loan agreement.

Erroneous Payment

On 16 February 2021, the United States District Court for the Southern District of New York[3] ruled that certain syndicate lenders that had received an erroneous payment from Citibank (acting as administrative agent) were not obliged to return the relevant monies despite a request from Citibank to do so.

In that case, Citibank had mistakenly transferred approximately $900 million to the lenders, which represented a full repayment of their participations in the facility rather than the accrued interest which had become due.

This immediately caused a stir in the market and, to provide protection for Agents in such situations, both the LMA and Loan Syndications and Trading Association (LSTA) developed template “Erroneous Payment” clauses requiring the repayment of monies to the Agent where such payments were made in error.

While the decision of the United States District Court was subsequently overturned[4] by the 2^nd Circuit on 8 September 2022, it will be no surprise if the Erroneous Payments clause continues to appear within loan agreements at the request of Agents.

Payment of Fees

Finally, given their independent nature and limited role in the transaction, a Third-Party Agent will frequently insist that its agency fee falls first in any payments waterfall agreed on a transaction.

Conclusion

While the LMA Loan Agreement provides a wide range of protections for Agents on syndicated loan transactions, the independent nature of a Third-Party Agent has resulted in certain additional protections / amendments being made at the request of such parties.  Given the scope of the role, these requests are often accommodated without resistance and for the most part, align with the commercial intention of the parties with respect to an Agent’s duties, obligations, and responsibilities.  However, while these are designed for the benefit of the relevant Agent, parties should be careful not to overly erode the role, thereby fettering any form of discretion that Agents may need to retain.