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

What is a negative covenant clause? A negative covenant is a promise not to do something during the life of a contract. It is most common in loan and bond documentation, where it restricts what the borrower can do without the lender's consent, but it also appears in commercial and employment contracts (for example non-compete and non-solicit undertakings). The purpose is to protect the counterparty's position by limiting the obligor's freedom of action while the obligation is outstanding. In a loan, typical negative covenants stop the borrower taking on more debt, granting security over its assets (the negative pledge), selling off assets, paying out cash to shareholders above a cap, or changing the nature of its business. The real negotiation is not whether to have them, but how wide the permitted exceptions are. This article is general guidance, not legal advice. Have a qualified professional review a contract before you rely on it. ## Sample negative covenant clause ```

NEGATIVE COVENANTS Until all amounts owing under this Agreement have been repaid in full, the Borrower shall not, without the Lender's prior written consent (such consent not to be unreasonably withheld or delayed): (a) incur or permit to exist any Financial Indebtedness, except Permitted Indebtedness; (b) create or permit to exist any Security over its assets, except Permitted Security (the Negative Pledge); (c) sell, lease, transfer or otherwise dispose of any of its assets, except Permitted Disposals; (d) declare or pay any dividend or make any distribution, except as permitted under clause [ ]; or (e) make any substantial change to the general nature of its business.

- **Permitted Security** carves exceptions out of the negative pledge, for example security arising in the ordinary course.
- **Permitted Disposals** allow routine sales up to a threshold. A negative covenant restricts action. A positive, or affirmative, covenant requires it (for example delivering accounts or maintaining insurance). Most financings use both. ## Common negative covenants in a loan, and why they exist - **Limit on indebtedness.** Stops the borrower loading up on new debt that would rank alongside or ahead of the lender.
- **Negative pledge.** Stops the borrower giving other creditors security over the same assets, which would push this lender down the queue on an enforcement.
- **Limit on disposals.** Stops the borrower selling the assets that support its ability to repay.
- **Limit on distributions.** Stops cash leaving the business to shareholders when it is needed to service the debt.
- **No change of business.** Stops the borrower moving into a riskier activity than the one the lender underwrote. Each covenant protects a different route by which the lender's position could be weakened, which is why they usually come as a set rather than one at a time. ## How to negotiate a negative covenant clause - **Size the baskets to the business.** Baskets that are too tight mean the borrower has to ask for a waiver for ordinary-course activity, which is slow and costly.
- **Fix the consent standard.** Push for "consent not to be unreasonably withheld or delayed" rather than consent in the lender's absolute discretion.
- **Add de minimis thresholds**, so small, routine actions do not breach a covenant.
- **For a negative pledge, protect ordinary trade terms**, so the covenant does not block normal supplier arrangements.
- **For restrictive covenants in employment or sale agreements**, keep scope, duration and geography reasonable, because an over-broad restraint may be unenforceable. ## Common mistakes to avoid - No baskets, or baskets too tight, so ordinary business needs constant waivers.
- A negative pledge drafted so widely it blocks everyday trade terms.
- Consent "in the lender's absolute discretion" with no reasonableness qualifier.
- An over-broad non-compete that a court will not enforce, leaving no protection at all. ## A note on jurisdiction Financial negative covenants in loan agreements are generally enforceable across jurisdictions, subject to the drafting. Restrictive covenants that restrain a person's trade are treated very differently from place to place. In India, section 27 of the Indian Contract Act, 1872 renders agreements in restraint of trade void, with a narrow exception for the seller of goodwill, so a post-employment non-compete is usually unenforceable in India, although confidentiality and non-solicit terms are approached differently. Some other jurisdictions enforce reasonable restraints limited in scope, time and geography. Always match the covenant to the governing law. Varies by jurisdiction. Last verified October 2026. ## Where a contract workspace helps Negative covenants are a web of restrictions and exceptions, and the risk lives in the gaps: a basket that is too tight, a negative pledge that catches ordinary trade, a consent standard with no reasonableness. Spotting that across a long facility agreement, and keeping it consistent with the borrower's other debt, is slow by hand. It is easier when drafting, reviewing, tracking and governing a facility agreement and its covenants live in one AI workspace tuned to your company, so the permitted baskets and thresholds stay in view and you can see where a covenant reaches. A tool like [Adira](https://adiralaw.com) follows this single-workspace approach for facility agreements. The explanation above stands on its own; a workspace simply makes the restrictions and their exceptions easier to see together.