Negative covenants are contractual obligations that restrict the borrower from engaging in specified actions without the lender’s prior approval. Common in UK property development finance, they often prohibit taking on additional debt, selling key assets, changing use of the property, or altering development plans. These clauses protect the lender’s position by limiting the borrower’s ability to make decisions that could undermine the development’s viability or the security’s value. Breaching a negative covenant may constitute an event of default, giving the lender the right to enforce remedies.
In practice, negative covenants form a key part of the wider framework of Legal Concepts & Obligations that governs the relationship between borrower and lender throughout a development project. They are typically drafted alongside Positive Covenants, with the former restricting certain actions and the latter requiring specific obligations to be fulfilled. For lenders providing a Stretch Senior Loan, these restrictions can be particularly important because of the higher leverage involved, helping to preserve project value, maintain oversight of material decisions, and reduce the risk of actions that could adversely affect repayment prospects or security coverage.
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