Following the UK's decision to leave the EU, businesses that are based in, trading with or investing in the UK have been questioning the implications that Brexit may have on their existing and impending financings. This blog aims to provide a brief summary of 7 key points for borrowers and creditors to consider when reviewing and preparing loan documentation with Brexit in mind.

  1. Choice of law- It is anticipated that a choice of Scots law will not fundamentally be affected by Brexit. EU courts should recognise parties express agreement to choice of law, regardless of whether this is an EU member state's law or not.
  2. Jurisdiction - Scottish courts will remain a popular choice of jurisdiction, notwithstanding the UK leaving the EU. While Scotland will no longer benefit from automatic mutual recognition of judgements between EU member states, there is good reason to believe this reciprocal recognition will continue in a different form.
  3. Illegality - An illegality provision usually allows a creditor to demand prepayment in full if it becomes illegal for it to maintain its participation in the loan, for example if a UK bank is no longer able to lend to an EU member state due to its lack of the necessary license. Creditors may wish to include contractual provisions providing greater flexibility to move lending in certain jurisdictions.
  4. Increased Costs- It is not clear what increased costs may result for creditors following Brexit. As a result, find easy to refinance no matter your credit, there may be greater focus on what is included in increase cost clauses until there is greater certainty as to what regulatory costs will apply in the UK post-Brexit.
  5. Art 55 of the EU Bank Recovery and Resolution Directive (BRRD) - The main aim of article 55 of the BRRD is to equip national authorities with powers to tackle crises at banks in the European Economic Area (EEA) at the earliest possible moment. If the UK does not remain within the EEA post-Brexit, EEA financial institutions would require to include specific contractual 'bail-in' clauses in its Scots law governed documents to comply with Article 55 of BRRD.
  6. Material Adverse Effect (MAE) - Given the turn of events in the UK since the referendum vote, parties may be wondering about the possibility of these events causing a "Material Adverse Effect," which allows creditor's to terminate due to the negative impact of a specific event. In short, this depends on the specific terms of the documents and the circumstances or events occurred and will need to be addressed on a case by case basis. However, Brexit itself is unlikely to trigger an event of default based on material adverse change.
  7. Withholding Tax- An important structuring issue for transactions, and although the allocation of risk on withholding tax sits with the borrower, both parties would want as little cash leakage as possible. The use of gross-up baskets may be a potential compromise.

Although there are a number of provisions to be considered, at this stage, it is unlikely that loan documentation will require major changes in the run up to the UK leaving the EU. However, in these somewhat uncertain times, creditors and borrowers should consider whether any of the points raised above may impact their financings.