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What are the standard clauses for a Loan Agreement?
Introduction
A loan agreement is a legally binding contract between a lender and a borrower that outlines the terms and conditions of a loan. In Kenya, loan agreements are governed by various laws, including the Law of Contract Act (Cap 23), the Banking Act (Cap 488), and the Consumer Protection Act (No. 46 of 2012). This document will outline the standard clauses typically found in a loan agreement, referencing relevant Kenyan laws and regulations.
Table of Contents
Parties to the Agreement
Loan Amount and Disbursement
Interest Rate
Repayment Terms
Security and Collateral
Covenants
Events of Default
Governing Law and Jurisdiction
Miscellaneous Provisions
Conclusion
1. Parties to the Agreement
Source: Law of Contract Act (Cap 23)
Identification of Parties: The agreement should clearly identify the lender and the borrower, including their full names, addresses, and identification numbers.
Capacity to Contract: Both parties must have the legal capacity to enter into a contract. This means they must be of legal age and sound mind.
2. Loan Amount and Disbursement
Source: Law of Contract Act (Cap 23)
Principal Amount: The agreement should specify the total amount of money being loaned.
Disbursement Method: The agreement should outline how the loan amount will be disbursed to the borrower, whether in a lump sum or in installments.
3. Interest Rate
Source: Banking Act (Cap 488), Section 44A
Type of Interest Rate: The agreement should specify whether the interest rate is fixed or variable.
Rate of Interest: The actual interest rate should be clearly stated.
Calculation Method: The method for calculating interest should be outlined, including whether it is calculated on a daily, monthly, or annual basis.
4. Repayment Terms
Source: Law of Contract Act (Cap 23)
Repayment Schedule: The agreement should include a detailed repayment schedule, specifying the amount and due date of each installment.
Prepayment: Terms regarding the borrower's ability to prepay the loan, including any penalties or fees for early repayment, should be included.
5. Security and Collateral
Source: Law of Contract Act (Cap 23), Banking Act (Cap 488)
Type of Security: The agreement should specify the type of security or collateral being provided, such as property, shares, or other assets.
Valuation of Collateral: The method for valuing the collateral should be outlined.
Rights of the Lender: The agreement should specify the lender's rights in the event of default, including the right to seize and sell the collateral.
6. Covenants
Source: Law of Contract Act (Cap 23)
Affirmative Covenants: These are actions the borrower agrees to take, such as maintaining insurance on the collateral or providing regular financial statements.
Negative Covenants: These are actions the borrower agrees not to take, such as incurring additional debt or selling the collateral without the lender's consent.
7. Events of Default
Source: Law of Contract Act (Cap 23)
Definition of Default: The agreement should clearly define what constitutes an event of default, such as missed payments or bankruptcy.
Remedies for Default: The agreement should outline the lender's remedies in the event of default, including the right to accelerate the loan and demand immediate repayment.
8. Governing Law and Jurisdiction
Source: Law of Contract Act (Cap 23)
Governing Law: The agreement should specify that it is governed by the laws of Kenya.
Jurisdiction: The agreement should specify the courts that have jurisdiction to hear any disputes arising from the agreement.
9. Miscellaneous Provisions
Source: Law of Contract Act (Cap 23)
Notices: The agreement should specify how notices are to be given, including the addresses for service of notices.
Amendments: The agreement should outline the process for making amendments to the agreement.
Entire Agreement: A clause stating that the agreement constitutes the entire agreement between the parties and supersedes all prior agreements and understandings.
Conclusion
A well-drafted loan agreement is essential for protecting the interests of both the lender and the borrower. By including these standard clauses, parties can ensure that their agreement is comprehensive and legally enforceable under Kenyan law. Always consult with a legal professional to ensure that your loan agreement complies with all relevant laws and regulations.
Answered by mwakili.com