24.5.1 Where an incoming Contractor pays market value on Contractor Default termination, or the Contract is terminated for Authority Default, the Authority should pay the Contractor by way of a lump sum.
24.5.2 On other types of termination, the Contract should deal with how compensation is paid. Value for money issues should be taken into consideration which in most cases will mean that compensation payments by lump sum will be the appropriate position. Value for money is unlikely to be achieved if the Authority repays such amounts over time (i.e. in instalments), as interest will continue to accrue on the compensation amount to reflect the equity/Junior Debt providers' and Senior Lenders' loss of opportunity. Moreover, the Authority's choice between lump sum and instalments should not be influenced by arbitrage possibilities (i.e. it would be bad practice to choose the long term option just because it can earn higher interest on amounts on short term deposit than it pays the Contractor).
24.5.3 While the above is the general position, local authorities may wish to reserve the option to pay over time due to affordability constraints, particularly as their ability to raise debt is regulated (see footnote 10). Therefore, where a local authority (or any other public body which has a valid VfM reason in accordance with Section 24.5.2) seeks the right to pay compensation by instalments it should follow the guidance set out below.
24.5.3.1 The Contractor will require the Authority to pay interest on any outstanding balance at the Senior Debt rate.7 If equity/Junior Debt compensation is payable on termination, the recommended approach for all Authorities is to restrict the Authority's right to pay by instalments to the Senior Debt related compensation.
24.5.3.2 If the Contract is terminated for Contractor Default and the Adjusted Estimated Fair Value of the Contract is payable to the Contractor as compensation, the appropriate interest rate payable on the outstanding balance is again the Senior Debt rate.8
24.5.3.3 If the Authority elects to pay compensation in instalments, the protections in the Contract in respect of payment default and unauthorised transfer of the Contract by the Authority should continue to operate9 but the Contractor should only have the ability to declare all outstanding instalments immediately due and payable on the occurrence of these events. If the Authority elects to pay compensation in instalments the Senior Lenders should not require the Authority to enter into new funding arrangements with them as they will have fixed security over the instalments to be paid by the Authority which will be paid in accordance with the Senior Lenders' instructions.
Required drafting for Contracts in which the Authority has the right to pay by instalments is set out below.10
24.5 Method of Payment
(a) The Authority shall pay to the Contractor the Termination Sum, together with interest on any Base Senior Debt Termination Amount or Revised Senior Debt Termination Amount element of the Termination Sum at the Senior Debt Rate, on or before the date falling 60 days after the Notice Date provided that it may elect to pay the Adjusted Estimated Fair Value of the Contract or the Base Senior Debt Termination Amount or the Revised Senior Debt Termination Amount (as relevant) element of the Termination Sum in accordance with paragraph (b) below.
(b) The Authority may, other than on an Authority Default, elect to pay the Adjusted Estimated Fair Value of the Contract or the Base Senior Debt Termination Amount or the Revised Senior Debt Termination Amount (as relevant) element of the Termination Sum:
(i) in instalments as follows:
(A) where the Base Senior Debt Termination Amount or the Revised Senior Debt Termination Amount or the Adjusted Estimated Fair Value of the Contract (as relevant) is greater than or equal to the Outstanding Principal:
(i) in respect of that element of the Base Senior Debt Termination Amount or the Revised Senior Debt Termination Amount or the Adjusted Estimated Fair Value of the Contract (as relevant) representing the Outstanding Principal, on the dates (the "Instalment Dates") and in the amounts that the Contractor would have been required to pay principal to the Senior Lenders under the terms of the Senior Credit Agreement had the Termination Date not occurred; and
(ii) in respect of the sum (if any) remaining after deducting the Outstanding Principal from the Base Senior Debt Termination Amount or the Revised Senior Debt Termination Amount or the Adjusted Estimated Fair Value of the Contract (as relevant), in equal instalments on the Instalment Dates
(B) where the Base Senior Debt Termination Amount or the Revised Senior Debt Termination Amount or the Adjusted Estimated Fair Value of the Contract (as relevant) is less than the Outstanding Principal, on the Instalment Dates pro rata to the amounts that the Contractor would have been required to pay as principal to the Senior Lenders on each Instalment Date under the terms of the Senior Credit Agreement had the Termination Date not occurred; or
(ii) as the parties may otherwise agree.
(c) From the Notice Date until the date of payment, interest shall accrue on any unpaid element of the Termination Sum at the Senior Debt Rate and be payable on the next occurring Instalment Date.
(d) If the Authority has elected to pay in accordance with paragraph (b) above, it may (on 28 days prior written notice to the Contractor) elect to pay the outstanding part of the Adjusted Estimated Fair Value of the Contract or the Base Senior Debt Termination Amount or the Revised Senior Debt Termination Amount (as relevant) element of the Termination Sum in full on any Instalment Date.
(e) If the Authority:
(i) fails to make a payment to the Contractor in accordance with paragraphs (a) and/or (b) and/or (c) above; or
(ii) breaches Clause 32.3 (Restrictions on Transfer of Contract by the Authority),
the Contractor may issue a notice to the Authority declaring any unpaid and outstanding element of (as applicable) the Adjusted Estimated Fair Value of the Contract, the Base Senior Debt Termination Amount or the Revised Senior Debt Termination Amount (as relevant) element of the Termination Sum and any accrued but unpaid interest to be immediately due and payable.11
means the later of the Termination Date and (if applicable) the date that the Adjusted Estimated Fair Value of the Contract is agreed between the parties pursuant to Clause 23.2.9 (No Retendering Procedure).
means the principal amount outstanding at the Termination Date of each borrowing (other than any borrowing under any equity bridge facility) under the Senior Credit Agreement.
means [ ]12 as at the date of this Contract or as amended with the prior written approval of the Authority pursuant to Clause 12.1.3 (Changes to Financing Agreements.
means any compensation payable by the Authority to the Contractor on an early termination of the Contract under Section 23 (Early Termination), excluding the Adjusted Highest Compliant Tender Price.13 14
means [incorporate the non-default interest rate definition in the Senior Credit Agreement] or such other lower rate as the parties may agree.
24.5.4 To the extent that any compensation amounts are paid to Senior Lenders, a provision such as the following should be included as required drafting:
The Authority shall be entitled to rely on the certificate of the Agent as conclusive as to the amount of the Base Senior Debt Termination Amount or the Revised Senior Debt Termination Amount outstanding at any relevant time. The receipt by the Agent of the Base Senior Debt Termination Amount or the Revised Senior Debt Termination Amount or elements thereof as relevant shall discharge the Authority's obligations to pay such sums to the Contractor.
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7 This is the non-default of interest payable under the Senior Financing Agreement.
8 Although the Adjusted Estimated Fair Value of the Contract may be greater than amounts owing to the Senior Lenders, the Contract will have terminated for reasons that the Contractor can control. In such circumstances, it is equitable for the equity/Junior Debt providers to accept that to the extent that the Adjusted Estimated Fair Value of the Contract is greater than the outstanding Senior Debt, interest will accrue on all outstanding amounts at the Senior Debt rate.
9 Clause 24.7.3 (Continuing Obligations) should provide that Clause 32.3 (Restrictions on Transfer of Contract by the Authority) survives termination of the Contract.
10 These provisions should now be viewed against the rights of local authorities to use the prudential borrowing regime for local government.
11 Break costs arising should also be payable in respect of the Base Senior Debt Termination Amount or Revised Senior Debt Amount elements of the payment.
12 Reference should be made here to the document under which the senior loan facility is made available.
13 See Clause 23.2.8 (Retendering Procedure) for the timing and manner of payment of the Adjusted Highest Compliant tender Price.
14 See Section 23.1.2.1 and the definition of "Authority Default". If the Authority is in breach of its obligations and the Contract is terminated, the compensation payable by the Authority to the Contractor should not be payable by instalments. The Authority should be entitled to pay by instalments if there is a voluntary termination of the Contract.