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Alex J.
Alex J., Litigator
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Experience:  LLB, LPC, DELF
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Situation Parties (companies) signed Loan agreement The Borrower

Resolved Question:

Situation
Parties (companies) signed Loan agreement
The Borrower wishes that third party pay instead of him. Lender does not object. The actual payer (New Borrower) is a related party to the Borrower.

Question:
In situation when parties want to fix this in the paper, what documents need to be signed?

1) Is it obligatory that Lender is a party to this "agreement of understanding"? If not, shall the Lender be informed that third party will pay? What are consequences if the Lender is not informed officially?

2) How the agreement, as described above, is called under English law?

3) Will it be considered that consideration (from the Borrower to the New Borrower) is agreed and adequate, if:

For example:

a) The Borrower promise to the New Borrower consideration 1:1 to the amount the New Borrower actually paid to the Lender?

b) It is mentioned that consideration shall be agreed by separate agreement

b1) it was agreed later that the Borrower will pay to the New Borrower 1:1 amount the New Borrower will pay to the Lender

b2) it was agreed later that the Borrower will pay to the New Borrower less than amount the New Borrower will pay to the Lender

b3) it was agreed later that the Borrower will NOT pay to the New Borrower any money for his help

4) If answer is No, there is no proper consideration in any of above mentioned cases does it mean that such agreement must be executed in the form of deed only, otherwise any agreement need to be considered us void?

5) If it needs to be executed in the form of dead and it was signed without witness, can any parties to this agreement challenge it?

For example:
1. Can the New Borrower claim money back from the Lender or Initial Borrower?
2. Can the New Borrower claim more money from the Borrower than he (the New Borrower) actually paid to the Lender instead of the Borrower?

6) Will the situation change if the Borrower and New Borrower are not related parties?
Submitted: 1 year ago.
Category: UK Law
Expert:  Alex J. replied 1 year ago.
Hi

Thank you for your question and welcome to Just Answer.

Does the lender want the borrower to no longer be liable for the loan and instead be "new borrower" will effectively step into his shoes?

Kind regards

AJ
Customer: replied 1 year ago.
the New Borrower only want to pay for the initial Borrower but do not expect to get any money from the Lender
Expert:  Alex J. replied 1 year ago.
Hi

Thank you.

So the lender still wants the original borrower to remain liable for the loan but a thrid party will be responsible for the repayments?

Kind regards

AJ
Customer: replied 1 year ago.
can this be flexible? Lets say the New Borrower will have right to pay a part of the loan but not obligation to pay it in full

As an option New Borrower may substitute the Borrower in all his obligations
Expert:  Alex J. replied 1 year ago.
Hi

Thank you.

If this is just a informal arrangement where by the third party agrees to pay the loan but he borrower is still liable for the debt then the lender does not need to be party to this arrangement and the two can sign whatever agreement they please.

If the obligation to repay is being moved at all from the borrower to the third party they will need to agree a deed of novation so that the third party all or in part steps into the borrowers shoes. The lender will have to consent to this and if he loan is secured then any secured lenders of the borrower will also have to consent.

Who's side are you on? The lender or borrower?

Kind regards

AJ
Customer: replied 1 year ago.
thank you for your answers!

in this case I am on lenders side but may happen that will need to be on the side of New Borrower
Expert:  Alex J. replied 1 year ago.
Hi

Thank you.

No problem. From the lenders point of view I would only let the borrower off the hook if one of the parties offers security ie a charge over property.

Otherwise there is no need for the lender to get involved if the want a third party to pay you then that is fine. If anything it is better because if the borrower went insolvent the payments from a third party would not be challange able as preferential.

Is there a commercial reason for this arrangement?

Kind regards

AJ
Customer: replied 1 year ago.
thank you for your unswers!

"Is there a commercial reason for this arrangement?"
- In fact I see no commercial reason behind. This is why I mention that Borrower and New Borrower are related party.

At the same time, it would be interesting to know how this situation shall look like if arm’s length principle is applicable


Expert:  Alex J. replied 1 year ago.
Hi

Thank you.

If the lender is not receiving any benefit and it is simply that the third party is now paying the repayments, then the lender need not get involved.

In what context do you want to know about the arms length principle? There is already an agreement in place here.

Any feedback is gratefully received. I look forward to hearing from you.

Kind regards

AJ
Customer: replied 1 year ago.

"In what context do you want to know about the arm’s length principle"

how normally this agreement shall look like if parties are not connected? What document may be provided if sum is substantial and smth on the paper need to be shown eg. to the bank/audit. What are normal business conditions for such transactions? Shall, for example, the New Borrower pay back to the Borrower less than New Borrower have paid to the Lender instead of the Borrower?

Ideally, I would like to see sample of such agreement. Could you probably recommend any contract template base (me be not free)?

Expert:  Alex J. replied 1 year ago.
Hi

Thank you.

It does not matter that the agreement isn't at arms length it only matters whether the terms are Commerical or I suppose friendly if you like.

Ideally what ever arrangement the borrower has with the lender, the new borrower will require the same with the borrower. For example same interest rate and same default provisions.

I look forward to hearing from you.

Kind regards

AJ
Alex J., Litigator
Category: UK Law
Satisfied Customers: 2686
Experience: LLB, LPC, DELF
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