No room to renege: why a mandate agreement matters to both arrangers and borrowers

A recent case highlights the crucial nature and implicit understanding of mandate letters or agreements, for both arrangers and borrowers, when it comes to the facilitation of a loan.

A mandate letter or agreement typically specifies the terms on which the arranger will put in place a loan for the borrower. Once the borrower signs this document, the mandate is granted.

The case

In June 2023, the High Court granted summary judgment in favour of Astra Asset Management (“Astra”), ruling that Odin Automotive (“Odin”) was liable to pay a break fee under a mandate agreement when Odin, as borrower, declined to proceed with the arranged loan facility.

Astra is a London-based credit and investment manager. One of the services it offers is to arrange loan facilities for clients with third party lenders.

Odin (now called B-ON) is a Luxembourg based company which, in 2021, was proposing to acquire shares in four companies and needed to raise finance for the purchase. Odin and Astra signed a mandate agreement (the “Mandate Agreement) under which it was agreed (amongst other matters) that:

1. Astra will use best efforts to arrange a USD20million term loan facility for Odin’s purchase, on the terms satisfactory to Astra.
2. The loan agreement will be prepared, executed and delivered by no later than 31 December 2021 or any other date agreed between Odin and Astra.
3. Astra will receive a non-refundable USD400,000 fee once the Mandate Agreement is signed.
4. An entity designated by Astra will be issued shares in Odin, with the percentage of shares to be calculated on the basis of an agreed formula.
5. Astra will be granted exclusivity period in relation to obtaining a loan facility until 2 February 2022.
6. If Odin or any of its associates breaches any of the undertakings or fails to close the transaction for any reason, Odin will immediately on demand by Astra, pay Astra an amount equal to USD2million together with any other external costs and expenses (together with any VAT on them) which have been incurred by Astra in connection with the proposed transaction.
7. Odin will, within three business days of demand, indemnify Astra and its associates against any cost, expense, loss or liability in relation to arranging the loan and the Mandate Agreement.

The share purchase agreement and loan agreement terms were then negotiated. However, on 31 December 2021, it was revealed Odin had obtained sufficient funds from other sources to complete the purchase of shares, and the share purchase subsequently completed on 3 January 2022. Nonetheless, Odin continued negotiating the loan agreement with Astra even after completion of the share purchase.

The loan agreement in relation to the loan facility arranged by Astra wasn’t signed and Astra requested a payment from Odin, citing the break fee and costs in accordance with the Mandate Agreement. Odin subsequently refused to pay, claiming Astra had failed to provide a loan facility that satisfied the requirements of the Mandate Agreement. Odin claimed the terms of the proposed loan agreement were onerous, unusual and unreasonable and therefore unacceptable. Odin also claimed it was put under undue pressure by Astra to sign the proposed loan agreement.

In March 2022, Astra issued a claim in relation to the break fee and costs on the basis that Odin (i) failed to close the arranged loan transaction and (ii) breached the exclusivity provision.

The judgement

In granting summary judgment, the Court found:

1. No undue pressure had been placed on Odin (based on the tone and content of the communications between the parties).
2. The mandate agreement did not require any proposed loan facility to contain only reasonable, usual or non-onerous terms. Astra’s obligation was simply to use its best efforts to produce a loan facility which was satisfactory to Astra, as the arranger. It would then be up to Odin whether to accept the package (subject to its obligation to pay the break fee).
3. Astra was entitled to the sums claimed: USD2million break fee and costs in the amount of just under GBP220,000, plus interest on both sums.

The Court also considered the indemnity clause which it determined created a “pay on demand and quibble later” provision.

The Court’s decision may provide comfort to lenders and arrangers with regard to the protection contained within mandate agreements.

However, it also serves as an important reminder for borrowers to check the terms of any mandate agreement including the consequences of not proceeding with loan offers made.

Hamlins Real Estate Finance team has the skills to ensure that our clients are properly advised on the terms of the finance documents, including mandate agreements and heads of terms. If you have any questions in connection with the above, please get in touch with us.