What are conditions precedent in a loan agreement?

How lenders use it

A lender lists its conditions precedent in a schedule to the facility agreement. The list is the lender's last check before money moves. The legal team, the credit team and the funding team all work from the same list.

Common CPs for a UK company loan include certified copies of the company's constitution and a board resolution that approves the borrowing. They include signed security, such as a debenture, and a personal guarantee with independent legal advice. They also include evidence of insurance, completed KYB checks, a search of the charges register and any valuation that the credit approval required.

Some conditions apply only to the first drawdown. Others apply to every drawdown, such as no default and that the lender's representations stay true. A development loan adds a surveyor's report for each stage.

The funding team tracks each CP as outstanding, received or satisfied. The team records who accepted it and when. An unsatisfied CP is a reason to refuse to release funds, and a waived CP needs a record of who approved the waiver.

Worked example

Example only. A lender approves a £500,000 term loan. The schedule lists six CPs. They are certified company documents and a board minute. Next come the signed debenture and a signed personal guarantee with a legal advice certificate. The last two are proof of insurance and a clear charges register search.

On the planned funding date, five are in. The insurance certificate does not name the lender as a party with an interest. The lender holds the money back until the broker sends a corrected one. The loan funds the next day.

Common confusions

A condition precedent is not a covenant. A CP must be met before funding. A covenant is a promise the borrower keeps while the loan runs.

A condition precedent is not a condition subsequent. A condition subsequent is something the borrower must do after funding, within a set time. Filing a charge at Companies House is often tracked this way.

Contract law also uses the phrase for any event that must happen before a contract takes effect. In lending, the phrase usually means the delivery list in a facility agreement. In the US, the informal word for a similar list is stips.

Questions lenders ask

What are examples of conditions precedent in a loan?

Common ones are signed security, board approval and certified company documents. Others are insurance, a valuation, KYB checks and a guarantee with legal advice. The mix depends on the product and the lender's credit approval.

Who decides if a condition precedent is satisfied?

The lender, often through its legal or funding team. The agreement usually says the documents must be in a form satisfactory to the lender. A record of who accepted each item should go on the file.

What is the difference between a CP and a covenant?

A CP is something to deliver before drawing the loan. A covenant is a promise that applies after funding, such as to keep a ratio above a level or to send accounts each quarter.

Can a lender waive a condition precedent?

Yes, if it chooses. The waiver should be in writing, approved at the right level and recorded. Many lenders turn it into a condition subsequent with a deadline.

Stips (stipulations): Documents a lender needs before it funds
Debenture: Security over a company's assets
Personal guarantee: An owner's promise to repay if the company cannot
Development finance: A staged loan that pays for a property build

This page is general information for lenders. It is not legal, tax or credit advice.