Negative Covenant

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Definition of 'Negative Covenant'

A negative covenant is a contractual obligation that a borrower agrees to in order to obtain a loan. These covenants are designed to protect the lender from certain actions that could jeopardize the loan.

Negative covenants can vary depending on the type of loan and the lender's specific requirements. However, some common negative covenants include:

* Restrictions on the borrower's ability to take on additional debt
* Restrictions on the borrower's ability to sell or lease assets
* Requirements for the borrower to maintain a certain level of financial performance

If the borrower violates a negative covenant, the lender may have the right to take certain actions, such as accelerating the loan repayment or calling for a default.

Negative covenants are important because they help to protect lenders from potential losses. However, they can also be restrictive for borrowers, and may make it difficult for them to take certain actions that could be in their best interests.

It is important for borrowers to understand the negative covenants in their loan agreements before they sign them. If there are any covenants that the borrower does not agree with, they should try to negotiate them with the lender.

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