Comfort letters
Comfort letters

The following Banking & Finance guidance note provides comprehensive and up to date legal information covering:

  • Comfort letters
  • Use of comfort letters in finance transactions
  • Non-legally binding comfort letters
  • Guidance on issuing non-binding comfort letters
  • Non-legally binding comfort letters—are there any remedies available to the lender?
  • Legally binding comfort letters
  • Legally binding?—indicative factors

Comfort letters are encountered in finance transactions relatively often. They take different forms and it is important from both the lender's perspective and the issuer's perspective to understand their legal effect.

Use of comfort letters in finance transactions

Comfort letters are often used in finance transactions where the lender is not able to obtain a guarantee. (For information on guarantees, see Guarantees—overview.)

Comfort letters are generally issued by a parent or holding company giving 'comfort' to a lender about their support for a subsidiary in the context of a finance transaction.

Comfort letters can vary widely in their effect and it is important for the parties to be clear at the outset what kind of letter is being issued and whether it is intended to be legally binding upon the provider or not. Most comfort letters are not legally binding. It is rare to come across a comfort letter that is intended to be legally binding.

Non-legally binding comfort letters

A non-legally binding comfort letter will typically:

  1. refer to the finance arrangements being made available to the subsidiary or include a confirmation that the parent company is aware of those arrangements

  2. set out the ownership structure between the comfort letter provider and its subsidiary, and

  3. include an acknowledgement from the parent company that:

    1. its current policy (ie as at the date