This Practice Note examines:
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why negative pledge clauses are used in commercial transactions
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the consequences of breaching negative pledge provisions
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how negative pledges are viewed in the context of security and quasi-security, and
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key considerations when drafting a negative pledge clause
Where appropriate, this Practice Note highlights relevant provisions in Precedent: Facility agreement (term loan): single company borrower—bilateral—with or without security or a guarantee and the Loan Market Association (LMA) investment grade multicurrency term facility agreement (the LMA facility agreement) (available to LMA members on the LMA website).
What is a negative pledge?
A negative pledge is a contractual undertaking, often contained in a facility agreement, which prohibits or restricts the promisor from creating encumbrances over its assets in favour of a third party. Negative pledges can prohibit the borrower entering into certain other arrangements that fall short of granting a full security interest but have a similar effect (for further information, see Practice Note: Granting security—key issues for borrowers). In Lending transactions, a negative pledge is commonly given by the borrower
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Jurisdiction(s):
United Kingdom
Related legal acts:
Key definition:
Lending definition
What does Lending mean?
The lending of copies of the work available for use, on terms that it will or may be returned.
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