How to analyse whether a material adverse change provision has been triggered

By Brian Cain

Material adverse change (MAC) clauses are a common feature of financing documents. Broadly speaking, their objective is to give the lender a chance to either prevent further drawdowns under an existing but undrawn tranche of a loan or call an event of default where the loan is fully or partially drawn. Although there have been a number of cases in the US that have considered such provisions, they have not come before English courts very often. A recent case had to consider whether a lender could take advantage of a MAC provision to stop a borrower making further drawing under a real-estate development financing. The judgment contains a few surprises for those who seek to rely on MAC clauses.

GHU as borrower had entered into a loan agreement with Carey as lender in relation to the development of the old Marconi Building in Aldwych into a luxury hotel. The development suffered as a result of the financial crisis and Carey ceased lending in June 2008.

GHU claimed that it has suffered loss as a result of Carey’s failure to honour its obligations under the loan agreement to allow GHU to make further drawings. There were two limbs to Carey’s defence to that claim. First, Carey claimed that it was not obliged to continue to lend because of certain financial defaults relating to the GHU group of companies arising out of the declining real-estate market in Spain. Carey argued that such defaults allowed it to trigger a MAC clause in the loan agreement that entitled it to prevent further drawings by GHU. Second, Carey argued that there were a series of ‘development defaults’ in relation to the redevelopment of the site in London that also entitled it to prevent further drawings. It is the first limb of the defence relating to the MAC clause that is of interest for present purposes…

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