Additional covenants: Overview, definition, and example
What are additional covenants?
Additional covenants refer to supplementary promises or obligations included in a contract that are separate from the main covenants or provisions. These covenants impose specific duties or conditions on the parties beyond those initially agreed upon. Additional covenants are often included to address new or evolving circumstances during the term of the agreement, such as changes in business operations, financial conditions, or legal requirements.
For example, a loan agreement may include an additional covenant requiring the borrower to maintain certain financial ratios or provide quarterly financial reports during the term of the loan, which is not part of the initial terms.
Why are additional covenants important?
Additional covenants are important because they allow parties to adapt to changing circumstances or to add further conditions that enhance the security, performance, or clarity of the agreement. These covenants can be used to address risks, ensure compliance with new regulations, or manage unforeseen situations without renegotiating the entire contract.
For businesses, additional covenants provide flexibility and assurance that both parties continue to meet agreed-upon obligations in light of new information or circumstances.
Understanding additional covenants through an example
Imagine a company enters into a merger agreement, and the parties agree to additional covenants that require one of the parties to maintain certain employee benefits or refrain from making large financial commitments without prior approval. These covenants are added to protect the interests of both parties during the merger process.
In another example, a real estate lease includes an additional covenant requiring the tenant to ensure that the property is compliant with any new local zoning laws or environmental regulations that come into effect during the lease term.
An example of an additional covenants clause
Here’s how an additional covenants clause might look in a contract:
“In addition to the covenants outlined in Section [Insert Section Number], the Borrower agrees to provide quarterly financial statements to the Lender and to maintain a minimum debt-to-equity ratio of [Insert Ratio] throughout the term of the loan.”
Conclusion
Additional covenants are used to add further terms and obligations to an existing agreement, ensuring that both parties remain aligned and protected throughout the contract's duration. These covenants allow businesses to address new developments or changing circumstances without the need for a full contract renegotiation.
By including additional covenants in contracts, businesses can enhance flexibility, safeguard against emerging risks, and maintain control over the evolving terms of the agreement.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.