Loan documents: do you read the fine print?
How many of us actually read the fine print when signing a document? The old adage suggests we should and with good reason. If you run a farming operation, it’s very likely that you’ll need to borrow funds from one of New Zealand’s main trading banks. It’s also vital that you read the fine print to avoid some unpleasant surprises. Here’s a summary in larger, easier to read print.
What most of us read
Naturally, most borrowers are usually concerned by what the loan will cost, the interest rate, the term of the loan, and how much each repayment will be. Next will be security, which will usually be a mortgage over farm land. Often, there is a general security agreement over farm assets such as receivables, stock, crops, machinery and so on.
What’s in the ‘standard’ conditions?
As you’ll be aware from advertising disclaimers, most banks apply standard terms and conditions to their mortgages, loans and general security agreements. With the need for transparency in lending practices, the loan facility agreement generally tends to be a short document that sets out the main terms of the loan (how much etc.). Often, the bank’s standard terms and conditions is supplied as a separate document. What you need to know is that your contract with the bank is made up from a combination of the loan facility agreement, the master terms and conditions, and the mortgage and general security agreement terms.
Here’s what generally comes as standard in most loan terms and conditions:
- Your obligations with regard to repaying any monies borrowed.
- Any representations you have to make as a borrower, such as consents under the Resource Management Act 1991 or Building Act 2004 for farming operation and that you haven’t breached the terms of any such consent.
- The bank may require you to make a covenant to do, or not to do, certain things such as sell any of the property without the bank’s consent, other than in the ordinary course of business.
- ‘Events of default’ which are a list of matters that enable the bank to take action under the security if those events occur. An example might be something like a new shareholder being introduced to the farm which would create a change in control of the borrower.
- Specific provisions regarding how the bank enforces its security.
Here’s why you need to read the fine print
We assume that if we are good borrowers, faithfully meeting our repayments on-time, that the bank will be happy. The logical progression of thought as we look at the 20-30 pages of terms and conditions is that it’s ‘just the fine print’ and that we don’t need to understand it what it says. We can’t stress this point enough: this is not the case. If you don’t understand the representations and covenants, you could find yourself in a compromised position.
While the scope of the terms and conditions tend to be generalised, some can be quite specific. In relation to the farming sector, common representations can include:
- That all, or substantially all, of your livestock are in prime health and condition.
- That you will replace any lost, dead or destroyed livestock with livestock of a like nature.
- That you will tend and care for livestock in accordance with accepted methods of animal husbandry.
- That your crops are in prime health and condition.
- That the proceeds of the sale of your crops or livestock are paid or delivered where the bank directs.
- That you will give the bank rights of access to your property to allow the bank to inspect its security.
More specific covenants
Without trying to sound like an infomercial, there will almost certainly be more specific covenants relating to compliance with relevant legislation such as the Resource Management Act 1991. In relation to that legislation, there will be a covenant requiring you to comply with any consents issued under the Act, that you don’t surrender any consents, and that you notify the bank if any action is taken against you under the Act.
Look in the terms and conditions for a ‘cover all’ event of default which will read something like this: Any other event (or series of events) occurs which, in the opinion of the bank, may have a material adverse effect on the debtor … or on the ability or willingness of the debtor to comply with the debtor’s obligations to the bank.
What this ‘cover all’ event of default shows is that the bank is interested in more than just your financial obligations to repay borrowed monies. For example, if you were to receive a prosecution under the Health and Safety at Work Act 2015 or the Resource Management Act 1991, the bank would gain the ability to call up its loan or enforce its security.
The bank has more control than you think
Banks aren’t in the business of not getting repaid if something goes wrong. The bank’s standard terms and conditions give it a great deal of control over your farming operation. In some instances, these terms and conditions will determine what you can or can’t do without the bank’s consent. While the wording of these terms may seem excessive or unfair, the courts generally don’t look too far past the wording of the contract between you and your bank in the event of a dispute.
The lesson here is that your bank is interested in more than receiving your repayments when they are due. If it chooses, it can review your farming operation and the way it is being carried out as a whole.
We don’t need to remind you that the environment, animal welfare, and health and safety are hot political topics. Don’t be surprised if banks start to take more interest in how you run your farm if you need to borrow money.
If you need more help with the fine print, contact our rural lawyers for a plain English explanation.