Negative pledge clause

A negative pledge clause is a type of a contractual clause which is to protect the creditor’s interests. If an agreement provides for a creditor-debtor relationship between the parties (usually a loan or credit facility agreement), such a clause protects the creditor’s claims by preventing the debtor from establishing further collaterals on the debtor’s property (e.g. a pledge or mortgage) or disposing of the debtor’s property in certain ways. Owing to that, the creditor is certain that its claim can be in future.

The negative pledge is usually used by financial institutions in lending business, but it can be also used by other entities. Such a clause can be used without any additional procedures or costs. It is enough to incorporate it in the agreement.

Maksymilian Marciniak, Lawyer