Purpose clauses in facility agreements and Quistclose trusts
Purpose clauses in facility agreements and Quistclose trusts

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

  • Purpose clauses in facility agreements and Quistclose trusts
  • What is a purpose clause?
  • What is a Quistclose trust?
  • Why are Quistclose trusts relevant to purpose clauses?
  • Drafting a purpose clause in a facility agreement
  • Specific purpose
  • Exclusive purpose
  • Other provisions in the facility agreement
  • Loans for unlawful purposes
  • Lender's obligation to monitor

This Practice Note considers what a purpose clause in a facility agreement actually is. It also explains what Quistclose trusts are, how they arise and why they are relevant to purpose clauses in facility agreements.

Where appropriate, this Practice Note highlights relevant provisions in:

  1. Precedent: Facility agreement (term loan): single company borrower—bilateral—with or without security or a guarantee

  2. the Loan Market Association (LMA) investment grade multicurrency term facility agreement (the LMA investment grade facility agreement), and

  3. the LMA senior multicurrency term and revolving facilities agreement for leveraged acquisition finance transactions (LMA leveraged facility agreement)

The other LMA standard form facility agreements, eg the LMA Senior Single Currency Term Facility Agreement for Real Estate Finance Multiproperty Investment Transactions, also contain sample purpose clauses.

LMA documents are available to LMA members on the LMA website.

What is a purpose clause?

Most facility agreements contain a clause specifying the purpose(s) for which the loan proceeds must be used. On specialist finance transactions, the purpose will be linked to the specific type of financing, eg to purchase or develop a property on a real estate finance transaction or acquire a company on an acquisition finance transaction. Otherwise, the agreement may state that the borrower may apply the proceeds of the loan towards ‘its general corporate purposes’.

The purpose clause may also specify what the proceeds of the loan may not

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