Q&As

Could a restriction in the proprietorship register of a property in favour of a mortgage lender be considered to be a negative pledge?

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Published on LexisPSL on 24/01/2020

The following Banking & Finance Q&A provides comprehensive and up to date legal information covering:

  • Could a restriction in the proprietorship register of a property in favour of a mortgage lender be considered to be a negative pledge?
  • Negative pledge
  • Restriction on title
  • Can a restriction on title be considered to be a negative pledge?

Negative pledge

A negative pledge is a contractual undertaking. In lending transactions, such a clause would typically prevent the borrower from creating security over or disposing of its assets. For an example of such a clause, see clause 5.1.2 of Precedent: Real property mortgage: single company chargor—bilateral—specific monies. However, some negative pledge clauses go further, for example, by stating that if security is deemed to be granted to another party in breach of the negative pledge clause, the original lender is granted security over the same assets on a pari passu basis.

The reasons for including a negative pledge clause in finance documents include:

  1. ensuring the lender’s repayment priority

  2. preventing the borrower incurring significant credit without the knowledge of the lender

  3. protecting a lender’s floating charge

Breach of a negative pledge clause may enable the lender to:

  1. call

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