Lenders will be familiar with material adverse change (MAC) provisions, but less clear about when they may be effective. Commonplace in loan documentation, these provisions may relieve a lender of its continuing obligations in the event that the financial condition of the borrower significantly deteriorates and threatens the borrower's ability to repay. In the recent case of Grupo Hotelero Urvasco S.A v Carey Value Added S.L & Anor the English Commercial Court considered the interpretation and application of these provisions and set out some useful guidance for lenders who may be considering relying on such provisions to terminate lending.


On 6 June 2008, in the midst of the global financial crisis, a lender (Carey) failed to advance a tranche under a loan agreement to the borrower (GHU). Carey wrote to GHU stating that it had become aware that the financial condition and prospects of GHU and other relevant parties had substantially deteriorated since the loan agreement was entered into. Carey expressed its significant doubts over GHU's ability to complete the development being funded, even after drawing down the maximum available under the relevant facilities. Carey's conclusion was based on a comparison in the GHU 2007 draft consolidated accounts between the 31 December 2006 and 31 December 2007 position. GHU responded stating that it remained confident that it could complete the development and that no grounds existed for asserting a default under the loan agreement. Carey did not advance any more funds and on 6 October 2008 it informed GHU that it was cancelling the facility.

The loan agreement contained a clause under which, GHU made a representation as to the absence of a MAC in its financial condition. This representation was made by GHU on the date of the loan agreement and was deemed to be repeated on the date of each subsequent advance in respect of the circumstances existing at the time.


GHU claimed damages stating that the failure of Carey to advance a tranche of the loan on 6 June 2008 was a breach of the loan agreement which resulted in the development failing. Carey claimed it had no obligation to continue lending as, amongst other things, the Urvasco Group (which included GHU) had suffered a material change in its financial condition and as such GHU was in breach of the MAC provisions of the loan agreement.


The Court considered, amongst other things, whether, on the facts, there was a MAC in the financial condition of GHU and/or other relevant parties between 21 December 2007 (when the loan agreement was entered into) and 6 June 2008 (when Carey failed to advance funds).

The Court acknowledged that there was a lack of case law on point and attributed this to the uncertainty of the interpretation of MAC provisions, the difficulty in proving a breach and the severe consequences if the lender incorrectly relies on such a clause. Although the Court acknowledged that each case would be fact specific, it did use this case as an opportunity to set out some guidance which lenders can look to when interpreting and applying MAC provisions.

Guidance for the interpretation and application of MAC provisions

  • Well established principles of contract law will apply to the interpretation of MAC provisions, i.e. the Court will give effect to what the parties have stipulated in their agreement by applying the unambiguous meaning of the specific language or what a reasonable person would understand the meaning to be if he or she had all the background knowledge reasonably available to the parties.
  • The assessment of the financial condition begins with the financial information available about the specific company at the relevant times (interim financial information and/or management accounts can be used for this purpose). That financial information needs to show that an adverse change occurred during the period in question.
  • The assessment of the financial condition can extend beyond the company's financial information if there is other compelling evidence. Such evidence may include the company failing to make payments in respect of other substantial debt.
  • A MAC must significantly affect the borrower's ability to perform its obligations, in particular its ability repay the loan in question. A MAC must also not be temporary.
  • A lender will not be able to invoke a MAC provisions if it was aware of the company's difficult financial circumstances at the time it entered into the agreement.

It is the lender that must prove the breach. Therefore the Court concluded, applying the above to the facts of this case, that GHU's parent company, and guarantor, Grupo Urvasoc S.A, had suffered a MAC (as it had ceased making payments of its bank debt). Carey failed to prove that GHU had suffered a MAC for the purposes of the loan agreement.