Thinking of accelerating? Not so fast - check your acceleration clause before speeding ahead to enforcement

Lenders and their lawyers alike may take it for granted that, where a borrower misses a scheduled payment or some other event of default occurs, the entirety of the borrower's indebtedness will become immediately due and payable. Not so, the Court of Appeal for Ontario confirmed earlier this year, reminding us that acceleration, like the many other remedies enumerated for good measure in those long lists contained in credit and security documents, is a right to be created by agreement between a lender and its borrower.

In SSS Limited¹, the dispute involved brothers who operated several family businesses together. One brother (the Vendor) commenced shareholder oppression proceedings against the other brothers (the Purchasers). The shareholder oppression proceedings were settled on terms providing for the purchase of the Vendor's shares pursuant to a lengthy schedule of monthly payments secured by a share pledge. Those shares were to be held in escrow until all payments had been made to the Vendor. Upon an event of default under the share purchase agreement, the shares would be transferred to the Vendor, additional interest would accrue on any late payments, lump sum payments would be required to catch up any shortfall in the monthly payments and the Vendor would be entitled to exercise any of his rights and remedies available at law.

When the Purchasers missed a number of the scheduled payments, the Vendor made demand and, after accepting several payments which brought the missed payments current, later obtained judgment for the total balance owing as well as all future payments.

On appeal, the Court found that while the terms of the share purchase and pledge agreements contained several provisions clearly setting out consequences of an event of default, none of those provisions permitted the acceleration of the remaining payments. The Court took note, moreover, of the Vendor's acceptance of post-default payments from the Purchasers as indicating that the Vendor did not consider that the default caused an acceleration. The rights and remedies available to the Vendor as the creditor at law, absent their inclusion in share purchase and pledge agreements, did not include a right to accelerate payments on default.

A lender's ability to accelerate scheduled payments gives teeth to its right to demand and is, in most cases, considered table stakes for any lending transaction large or small. As such, it is not often discussed in great detail by a lender and its borrower, even less frequently negotiated and is ubiquitous in credit agreements used by sophisticated lenders. As a result, many might consider acceleration to be a right implied by a lender's agreement to loan money to an arm's-length borrower. It is not. Any lender that is preparing bespoke terms for a lending transaction, revising existing boilerplates or reviewing a borrower's form of agreement or proposed remedies language should be cognizant of the substantial flaw that exists in any credit agreement for term loan facilities that does not contain an acceleration clause. If acceleration is taken for granted and not provided for under the terms of the lender's credit agreement or other loan documents, the lender may have to wait in order to get paid in full by its defaulting borrower.