Key Point

A success fee provision contained in a suite of Finance Documents – even one which triggers a very substantial payment – will not be a penalty if it is not triggered by a breach on the part of the party obliged to make the payment and is designed to reward a lender for significant risk undertaken by it.


In the immediate aftermath of the collapse of Lehman when loan markets froze a loan package was put in place relating to the financing of a large commercial property in Spain. The senior, junior and associated shareholder loans amounted to more than 2billion euros.

The original junior lender also took a upside fee agreement. The fee became payable under this agreement upon the occurrence of a Payment Event. Payment Event was widely defined and included any event which resulted in the junior loan being the subject of a mandatory repayment. A critical feature of the fee arrangements was that the fee was going to be payable in any event and the occurrence of one or more a the defined Payment Events simply affected the time at which the fee became payable.

One of the Events of Default in the junior loan was a cross default which allowed the lender to demand repayment if there was a default under the associated shareholder loan agreement. When the shareholders missed interest payments the junior lender demanded repayment of the junior loan and the fee payable under the upside fee agreement.

The upside fee payable was calculated to be well over 100 million euros.

Ramblas the borrower argued the fee was a penalty. Edgeworth who by this time had become the junior lender argued it was not and though large was commensurate with the risks undertaken by the original junior lender at the time of the deal.


The Court held that the payment was not a penalty. In coming to this conclusion the Court stated that the fee was always going to be payable under the upside fee agreement and the nature of the defined Payment Events simply went to the issue of when the fee became due not the level of the fee payable. In addition the Court though that Edgworth's more technical argument that the triggers for the fee were not just a breach of the junior loan agreement but other events which did not constitute a breach was correct and this was a compelling reason for holding the provision was not an unenforceable penalty. Finally, the Court noted that in the instant case the breach which had brought about the payment was not one by the payer of the fee but a breach by the shareholders. This also argued against the term being a penalty.


This case is good news for lender who take such fees. The analysis of the Court is extremely favourable because it held that the different lines of attack deployed by the borrower to defeat the fee provision all failed. The Court clearly thought the junior lender – making money available at a time of severe dislocation in the money markets – was entitled to be compensated for that risk. One can imagine success fees in financial restructurings being placed on a similar footing should the issue come before the Courts.