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The practical implications of Brexit for lenders and borrowers (1 of 3)

We have all seen and heard the constant commentary about Brexit, but we want to focus in this first article in our three-part series on the practical implications for lenders and borrowers, and their finance agreements.

The second article will consider more specific impacts on facilities agreements.  

The market we operate in and the documentation we are familiar with are going to change, but there are more likely to be adjustments than wholesale changes in typical lending and borrowing deals because of Brexit, although it may currently feel like it’s more fundamental. If you are a UK borrower and a (single) UK lender, then your current finance arrangements are unlikely to be directly affected, but there will be indirect impacts. Both lenders and borrowers should be thinking about whether their existing loan agreement will still work as intended.  

Importantly, will Brexit constitute a material adverse effect or a force majeure event under or frustration of the facilities agreement? The answer is we don’t know yet. By way of illustration, the European Medicines Agency, which will no longer be able to operate in the UK after Brexit, has a lease over premises in Canary Wharf. The case went to court in January 2019 to determine if that will be frustration of contract or not. The judge found (though of course it may be appealed) that while performance of the contract involving an agency of the European Union would lead to unavoidable illegality of that contract, the lease contract was not frustrated; instead of performing in breach of the law, that agency would instead have to breach its lease contract and accept liability to pay damages (or continue to meet the lease obligations even though it cannot operate from the offices). So, check existing agreements and, if necessary, address that now.

It is important that lenders and borrowers communicate on what they expect and how they will respond, but it is improbable that a mass repayment and refinancing of facilities will be triggered because of Brexit, and it is difficult to see how the market would cope if it is.

What impacts to expect on finance arrangements generally?

Invoice Financing: Do payments to the business come from sources in Europe? If so, will these payments still be received, and will they suffer from any delay, restriction or withholding? Does this impact the invoice financing arrangement?

Business operations generally: Are there representations, undertakings, covenants or events of default in the finance agreement that will be affected by, or need to be addressed because of:

  • The potential impact on the business from (i) additional tariffs, duties or import VAT (especially between the UK and EU but also between the UK and certain other countries) and (ii) delays in goods deliveries, especially between the UK and EU?;
  • Rules of Origin effects on constituent parts used in the business, both in the EU and where those parts are used in products destined for countries outside the EU;
  • Additional export licences that may be required following Brexit;
  • New regulatory approvals or product certifications that may be required for the business from either the EU or the UK, where currently one licence or approval covers both.

COMI: Typically, finance agreements contain representations that COMI (centre of main interest – where the head office business is conducted) is and will remain in UK or the original EU jurisdiction. Does the business need to change roles/responsibilities/ reporting lines in the UK or outside the UK as a result of Brexit (and has the impact of such transfers been assessed)? What does the finance agreement say about change of COMI?

Security and guarantees: Are there assets in Europe? If so, are they referred to in the facilities agreement or is there security over them? For example - Intellectual property: does the business rely on EU registered design or trade mark protection? How will those be enforced following Brexit? What impact will the absence of EU geo-blocking restrictions have on the business after Brexit? What continuing, additional or alternative registration requirements might there be? Are security or facilities agreement covenants going to be breached, perhaps automatically? Remember that, if there are any changes to the loan documentation, then always get the security and guarantee s checked as they may be impacted.

Tax: What will the impact be on interest, dividend and royalty payment flows within the business and especially across borders? Is there likely to be an impact on financial covenants, tax withholding or gross-up provisions, or ability to meet repayments?

Finally, some key points to note

  • This article does not provide an exhaustive list – these are only some of the more likely impacts and implications for loan arrangements;
  • Please take advice from your legal team as even minor amendments can have wider implications than appear at first. In particular, where there are changes to facilities agreements, there are likely also to be implications for security and guarantees, and the whole transaction should be looked at in that context;
  • Where there is a borrower group then consider the cross-collateralisation position and the knock-on effect of an issue for any one of the members of the group on the rest, and on their loan and security arrangements;
  • Regardless of whether we exit in March, some time after or not at all, it was clear before the referendum in June 2016 that UK was pushing for changes in its relationship with EU – there is no going back to how it was before;

The government has the power to implement and make changes to in-flight financial services legislation for two years after the UK withdraws from the EU in a no-deal scenario.


This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given. © Shoosmiths LLP 2022.


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