Brexit—how does it impact LMA facility documentation?

This News Analysis provides a summary of the note published by the Loan Market Association (LMA) in which they address five key documentary areas where questions have been raised as to the potential effect of Brexit: (1) use of English law, (2) jurisdiction provisions, (3) EU references in documentation, (4) lending restrictions, and (5) Article 55 Bail-In clauses.

Original News

Although Brexit will likely affect the future financial landscape in the UK and Europe, for the most part it will not create a need for immediate contractual change, the Loan Market Association (LMA) has said. To reassure the market, the LMA has produced a note  which addresses some Brexit-related concerns for LMA facility documentation.

What does the LMA note on documentary implications of Brexit cover?

On 6 September 2016, the LMA published a note addressing five key documentary areas where questions have been raised as to the potential effect of Brexit. These are:

  • use of English law as the governing law of LMA facility documentation
  • jurisdiction provisions in LMA facility documentation
  • EU references in LMA facility documentation
  • lending restrictions, and
  • Article 55 of the Banking Recovery and Resolution Directive (2014/59/EU) (BRRD) Bail-in Clauses

For each of the above points, the note looks at potential issues that may arise as a result of Brexit. The note then discusses whether the LMA intends to make any changes to LMA facility documentation and/or whether parties using the documents should potentially consider making any changes.

The note is not intended to be comprehensive or to give legal or other advice.

This News Analysis summarises the points made in the note. The note can be read in full by members of the LMA by logging into the LMA website.

Use of English law as the governing law of LMA facility documentation

Summary of issue

Most of the LMA's recommended forms of documentation are expressed to be governed by English law (except for those designed specifically for the requirements of local markets). Questions have been raised as to how Brexit may affect the choice of English law to govern facility documentation.

Does any action need to be taken?

In summary, the LMA does not plan to make any change to the governing law of its recommended forms of documentation. This is because:

  • English commercial contract law is largely unaffected by EU law
  • the emphasis of English law on upholding the deal commercially agreed between the parties will not change and this is one of the key reasons why English law is, and will remain, a popular choice of governing law, and
  • the effect of the Rome I Regulation (Regulation (EC) No 593/2008) means that EU Member States will give effect to the parties' choice of law regardless of whether that law is the law of an EU Member State or not

Jurisdiction provisions in LMA facility documentation

Summary of issue

The majority of the LMA's recommended forms of English law facility documentation use one-sided exclusive jurisdiction clauses. These permit lenders to bring proceedings in any court of competent jurisdiction but require obligors to bring proceedings in English courts only. Questions have been raised as to how Brexit might affect the enforceability of judgments by English courts or otherwise impact on the suitability of jurisdiction clauses as currently typically drafted.

Does any action need to be taken?

It is possible that Brexit could affect the extent to which a judgment of the English courts is enforceable in other Member States. For example, if not dealt with as part of the negotiations, the enforceability of English judgments post-Brexit will depend on the domestic law in that Member State (as is currently the position with eg New York law). However it is equally possible that EU wide recognition of English judgments could be agreed.

The LMA does not currently plan to make any changes to the dispute resolution clauses in its recommended forms as:

  • it is currently uncertain what (if anything) will be agreed during Brexit negotiations
  • the existing clause provides flexibility for lenders, and
  • the reasons for the popularity of the English courts, namely commerciality and relative speed at solving commercial disputes as well as the fact that it is common to align governing law and jurisdiction, will not be affected by Brexit

EU references in LMA facility documentation

Summary of issue

LMA facility documentation contains a number of references to the 'European Union' or to EU legislation.

Does any action need to be taken?

The note states that the LMA will seek to address any appropriate changes to references to the European Union or EU legislation in due course. In the meantime, parties should consider themselves whether any supplementation to the references is appropriate in the context of the transaction.

Lending restrictions

Summary of issue

In some EU jurisdictions, lenders are required under domestic legislation to have licences to lend. EU passporting currently allows UK based lenders to lend into these jurisdictions by virtue of them being regulated entities in the UK. There is a risk passporting could be lost on a UK withdrawal from the EU.

Does any action need to be taken?

Members could consider including wording allowing the loans to be made by affiliates in the EU (designated entity clauses). The LMA is currently preparing a form of designated entity clause for inclusion in its recommended forms of facility documentation.

Article 55 bail-in clauses

Summary of Issue

Article 55 of the BRRD requires EEA financial institutions to include a bail-in clause in any document governed by the law of a non-EEA country under which the EEA financial institution may have contractual or non-contractual liability. Currently, there is no requirement to include a bail-in clause in English law governed documents as the obligation only applies to contracts governed by non-EEA law. However, if the UK ceases to be a member of the EU, then contracts governed by English law may become subject to the Article 55 requirement.

Does any action need to be taken?

There are a number of ways in which the UK could avoid being subject to the provision, namely:

  • membership of the EEA
  • transitional arrangements agreed prior to withdrawal
  • application of the exception in Article 55(1) BRRD under which the requirement to include bail-in clauses would not apply if, under UK law, the liabilities could be written off or converted by a resolution authority of a member state, and/or
  • changes to the BRRD ahead of the UK's withdrawal

Since it is not yet clear whether Article 55 will apply to English law governed contracts, the LMA is not recommending that they should contain bail-in clauses at this stage. However, the note suggests that institutions could consider whether to include such provisions as a precautionary measure where the term of the contract may extend beyond the expected date of withdrawal. This may particularly be the case where the financial institution is a borrower and wishes to classify its borrowing liabilities as MREL /TLAC eligible liabilities.

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