early repayment of an investment loan: to pay a reinvestment fee or not?

A company sometimes wishes to repay an investment loan early. For example, it happens that a loan is entered into with a term of 20 years to finance the purchase of a commercial building. When the company can sell the building at a profit 5 years later, it will want to repay the bank early – so that it no longer has to pay interest on the capital drawn – and want to collect the capital gain.

However, in the event of an early repayment, the bank will usually charge a reinvestment fee. After all, the bank had counted on a fixed return in the form of interest for 20 years. She now sees some of that revenue being lost. To absorb that loss, a reinvestment fee is charged.

This fee can be high. Certain case law and legal doctrine try to adapt to this by qualifying an investment credit as a loan. For this type of agreement, the reinvestment fee can amount to a maximum of 6 months' interest (Art. 1907bis of the Dutch Civil Code). Other case law and legal doctrine consider an investment credit as a credit facility. With this type of agreement, the bank has more freedom in determining the amount of the reinvestment fee.

The Court of Cassation has recently ruled on this discussion in its judgments of 27.04.2020 (C.19.0602.N) and 18.06.2020 (C.19.0140.N). It ruled that an investment credit can be qualified as a credit facility.

An analysis by Mr. Cedric Haspeslagh of these judgments can be found on the blogspot Corporate Finance Lab.