Side Deeds – what, when and why?

By Amy Tin - Special Counsel, McCullough Robertson

11 Dec 2019

Originally published 11th December 2019, reposted with permission from WiBF Corporate Member, McCullough Robertson Lawyers.

In the financing world, side deeds (sometimes also referred to as tripartite deeds, consent deeds or direct agreements) are frequently the source of robust negotiations between parties. This article briefly explores when a lender needs a side deed and the key elements that a lender should require when obtaining one.

What are side deeds?

Side deeds create a direct contractual relationship between the lender and a third party to a financing. That third party would be the counterparty to a key contract or arrangement with a borrower. Generally, that contract or arrangement is essential to the borrower’s business or the project being funded by the lender.

The most common examples of key contracts where a lender may require a side deed are:

When is a side deed required?

A lender should obtain a side deed where any of the above arrangements are difficult or expensive to replace, are unique or of limited supply, or where the termination of the contract would be materially adverse to the going concern of the borrower’s operations or the project.

For example, the leased premises for a retail business such as a restaurant may rely on its unique location as a large part of its goodwill, and if the lease is terminated and the restaurant forced to move, a new location may prove to be less successful (in addition to the obvious significant costs relating to physical fit-out). A side deed can assist to prevent the unexpected termination of such a lease. On the other hand, the lease for a generic storage facility for non-perishable goods may be readily replaceable with an alternative lease on comparable terms, and therefore a side deed may not be necessary.

What are the key terms of a side deed?

The content of a side deed can vary depending on the type of contract involved, but there are a few key elements which a side deed should cover:

A side deed can also include bespoke provisions to ‘fix’ any deficiencies in the underlying contract that the lender discovers during its due diligence. For example, expired milestones or sunset dates, material changes to scope or obligations, or breaches that have not been formally waived or cured, can be dealt with in the side deed between the parties.

Why would a counterparty agree to a side deed?

A significant source of difficulty in obtaining a side deed relates to the borrower having not prepared the counterparty for the possibility of signing up to a side deed during negotiations.  Ideally, prior to signing the relevant contract, the borrower should discuss the requirement for a side deed with the counterparty and include an obligation to execute one as a condition to entering into the contract.

Acknowledging that prior negotiation may not be a realistic possibility, the general argument for a counterparty to accept a side deed is that without one, the lender will not provide financing and therefore the borrower will not have the financial resources to continue to make payments or fulfil other obligations under the contract. Additionally, the counterparty should gain some comfort that the borrower is backed by a significant lender, who by executing a side deed has a vested interest in the contract and may later cure and remedy defaults.

In some sectors, such as for building contracts, side deeds are standard market practice and most sophisticated builders will be familiar with them (some may have their own accepted standard form).  Certain powerful counterparties, such as listed retailers, may refuse to enter into side deeds or provide simple consent letters with basic cure rights. In both cases, lenders should seek legal advice before agreeing to accept a document produced by a counterparty.

When should a lender start the process of a side deed?

Early engagement is the best approach to procure the best result for a lender on a side deed. From our experience, when timing becomes an issue the lender may be forced to compromise or make significant concessions to the counterparty to meet a looming borrower deadline. In those circumstances, or where there are a significant number of counterparties (e.g. for a large retail borrower with numerous premises), it may also be necessary to have the side deed or deeds as a condition subsequent to funding.

During first discussions with a borrower, lender’s counsel can usually provide a pro forma or example side deed that a borrower can socialise with a counterparty. The initial response can guide the lender on whether there is appetite for a side deed, or if approvals need to be sought for a compromise that may fall short of some of the key side deed elements.

For further information, please contact the helpful staff at McCullough Robertson

Disclaimer: This article provides general information only and is not intended to be legal advice. The content should not be relied upon in any way. Any republication should be of this article in its entirety or otherwise with the consent of the authors.

This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.