Representations and warranties of the borrower: Overview, definition, and example
What are representations and warranties of the borrower?
Representations and warranties of the borrower are statements or assurances made by the borrower in a loan agreement, affirming the accuracy of certain facts or conditions. These declarations assure the lender that specific conditions are true and accurate at the time of entering into the agreement. The borrower may also warrant that certain events or circumstances will remain true during the term of the loan.
A representation refers to a statement of fact, while a warranty is a promise that a certain condition will hold true. If a representation is found to be false, or a warranty is breached, the lender may have legal grounds to terminate the loan or seek remedies.
For example, a borrower may represent that they have the legal capacity to enter into the loan agreement and that there are no outstanding legal disputes that could affect their ability to repay the loan.
Why are representations and warranties of the borrower important?
Representations and warranties are important because they provide the lender with the assurance that the borrower is financially stable, legally compliant, and able to fulfill their obligations under the loan. They also help mitigate risks by confirming the borrower's financial condition, legal standing, and business operations.
For lenders, these provisions ensure that they have accurate information to assess the risk of lending. For borrowers, providing truthful representations and warranties helps maintain the integrity of the agreement and fosters trust with the lender.
Understanding representations and warranties of the borrower through an example
Imagine a company seeks a loan to expand operations. As part of the loan agreement, the borrower represents that it is a validly incorporated company with the necessary legal authority to enter into the loan agreement. The borrower also warrants that no material legal proceedings are pending that could adversely affect the loan repayment. If either of these representations is later found to be false, the lender could take legal action or demand repayment.
In another example, a real estate developer applies for a loan to finance a property project. The developer represents that all required zoning approvals have been obtained and that the property title is clear. If the borrower is later found to have misrepresented these facts, the lender may have the right to call the loan or seek damages.
An example of representations and warranties of the borrower clause
Here’s how a representations and warranties clause might appear in an agreement:
“The Borrower represents and warrants to the Lender that: (i) it is duly organized and in good standing under the laws of its jurisdiction of incorporation, (ii) it has the full legal authority to enter into and perform its obligations under this Agreement, (iii) there are no legal or regulatory actions pending or threatened that would materially affect its ability to repay the loan, and (iv) the execution, delivery, and performance of this Agreement do not conflict with any other agreements or laws to which the Borrower is subject.”
Conclusion
Representations and warranties of the borrower play a critical role in providing the lender with assurance that the borrower is financially and legally sound. For lenders, these clauses offer protection and reduce risk by ensuring the borrower’s claims are truthful and verifiable. For borrowers, making accurate representations ensures the integrity of the agreement and fosters a transparent, trusting relationship. Including clear and enforceable representations and warranties in loan agreements is essential for both parties to understand their obligations and the legal implications of the agreement.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.