The Affirmative Covenant Clause: What It Means and How to Negotiate It (2026)

What is an affirmative covenant clause? An affirmative covenant, also called a positive covenant, is a promise to do something during the life of a contract. It is the positive mirror of a negative covenant, which promises not to do something. Affirmative covenants are most common in loan and bond documentation, where they keep the lender informed and keep the borrower in good standing. Typical affirmative covenants require the borrower to pay on time, deliver financial statements and management accounts, maintain insurance and the licences it needs, comply with applicable law, notify the lender of any default, and keep agreed financial ratios (financial covenants). The negotiation is mostly about how demanding the obligations are and how much room the borrower has if it slips. This article is general guidance, not legal advice. Have a qualified professional review a contract before you rely on it. ## Sample affirmative covenant clause ```

AFFIRMATIVE (POSITIVE) COVENANTS For so long as any amount is outstanding under this Agreement, the Borrower shall: (a) deliver to the Lender its audited annual financial statements within [N] days of each financial year end, and its management accounts within [N] days of each quarter; (b) maintain all authorisations and licences required to carry on its business, and comply in all material respects with applicable law; (c) maintain insurance with reputable insurers against the risks a prudent company in its business would insure against; (d) promptly notify the Lender on becoming aware of any Default; and (e) ensure that [financial covenant, for example the ratio of Net Debt to EBITDA] does not exceed [X], tested [quarterly] on a rolling basis.

- **Financial covenants** require the borrower to keep a financial metric within a set level, tested periodically. Common ones are a maximum leverage ratio (net debt to EBITDA), a minimum interest cover ratio, and sometimes a minimum liquidity test. A breach is usually an event of default, so headroom and cure rights matter. ## The reporting package and the equity cure Two features are worth understanding in detail: - **The reporting package.** Lenders usually ask for audited annual accounts, quarterly management accounts, and a compliance certificate confirming that the financial covenants have been met, often signed by a director or the finance head. The compliance certificate is where the borrower shows its working on the ratios, so an error there can itself become a problem.
- **The equity cure.** For financial covenants, borrowers often negotiate the right to cure a breach by injecting new equity, which is treated as increasing EBITDA or reducing net debt for that test, so a temporary dip does not become a default. Cure rights are usually limited in number and frequency, for example no more than twice in any 12 month period, because a lender does not want covenants that can be cured indefinitely. ## How to negotiate an affirmative covenant clause - **Add materiality and reasonableness qualifiers.** "Comply in all material respects with applicable law" is far safer for a borrower than an absolute compliance obligation.
- **Set realistic reporting timelines**, matched to what the borrower's finance function can actually produce.
- **Negotiate grace and cure periods**, including an equity cure right for financial covenants, so a temporary slip can be fixed rather than becoming an immediate default.
- **Limit notice obligations to actual knowledge**, so the borrower must notify a default it is aware of, not one it could not reasonably have known.
- **Build headroom into financial covenant levels**, so ordinary fluctuations do not trip a default.
- **Agree the definitions behind the ratios.** Terms such as EBITDA, Net Debt and Cashflow can be defined in ways that flatter or punish the borrower, so the definitions matter as much as the ratio levels themselves, and are worth negotiating with the same care. ## Common mistakes to avoid - Reporting deadlines the borrower cannot realistically meet, so it is in technical breach from the start.
- Financial covenants with no headroom and no cure right, so a small dip becomes an event of default.
- An absolute "comply with all law" covenant instead of a material-compliance standard.
- An insurance covenant that does not match the cover the business actually carries. ## A note on jurisdiction Affirmative covenants are a global feature of lending documentation and are generally enforced as ordinary contract terms. Financial covenants are central to leveraged and mid-market finance everywhere. In India they are enforced as contract terms, and for regulated lenders they sit alongside regulatory norms. [VERIFY: specific Reserve Bank of India norms that apply to covenant structures for a given lender type] The precise content of maintenance covenants (such as which licences and filings are required) depends on local law and the borrower's sector. Varies by jurisdiction. Last verified October 2026. ## Where a contract workspace helps Affirmative covenants are a calendar as much as a clause: accounts due on a date, insurance to keep live, ratios to test each quarter, notices to give promptly. Missing one can be an event of default even when the business is healthy. Drafting affirmative covenants, reviewing them, and keeping their reporting and testing dates in sight can all sit in one AI workspace tuned to how your company borrows, so a covenant is harder to miss when the business is otherwise healthy. [Adira](https://adiralaw.com) is one such workspace for affirmative covenants and the facility terms around them. The explanation above stands on its own for understanding and negotiating them.