Certain covenants: Overview, definition, and example
What are certain covenants?
Certain covenants refer to specific promises or agreements made by one party to another in a contract, usually to take or refrain from certain actions during the course of the agreement. These covenants are often outlined in detail within a contract and can involve obligations related to performance, conduct, or other specified actions. Certain covenants are distinct because they are clearly defined within the contract and typically cannot be modified or waived unless agreed upon by both parties.
In general, a covenant is a formal, legally binding promise, and when the term certain covenants is used, it often refers to particular promises that are crucial to the functioning or enforcement of the contract. These covenants can be categorized into two types: affirmative covenants (promises to do something) and negative covenants (promises not to do something).
Why are certain covenants important?
Certain covenants are important because they help define the responsibilities and expectations of each party involved in a contract. By clearly specifying the actions or behaviors that are required (or prohibited), these covenants reduce ambiguity and help ensure that both parties are aligned in their goals and obligations. They serve to protect both parties by setting clear terms and providing mechanisms for enforcement if the covenants are breached.
For businesses, certain covenants can be essential for maintaining operational integrity, compliance with regulations, or financial stability. For example, covenants in loan agreements may require a borrower to maintain certain financial ratios or avoid taking on additional debt without the lender's approval.
Understanding certain covenants through an example
Imagine a company, Company A, enters into a contract with a supplier, Supplier B, to provide raw materials for a production line. In the contract, Company A agrees to purchase a minimum quantity of materials each month (an affirmative covenant). Additionally, Supplier B agrees not to sell the same materials to any competitor of Company A for the duration of the contract (a negative covenant).
In another example, a real estate lease agreement between a landlord and tenant includes certain covenants where the tenant agrees to maintain the property in good condition (an affirmative covenant), and the landlord agrees not to lease any nearby space to a competitor of the tenant's business (a negative covenant).
An example of certain covenants clause
Here’s how a certain covenants clause might appear in a contract:
“The Borrower agrees to maintain a minimum debt-to-equity ratio of 2:1 for the duration of the loan term. The Borrower also agrees not to incur any additional debt beyond the agreed limit without prior written consent from the Lender. These covenants shall remain in effect until the loan is fully repaid.”
Conclusion
Certain covenants are specific, legally binding promises made within a contract that define the responsibilities, actions, or restrictions placed on the parties. They help ensure clarity and enforceability in business agreements and can provide mechanisms for addressing breaches or non-compliance. Whether involving performance obligations, conduct restrictions, or other promises, certain covenants are essential for managing expectations and safeguarding the interests of all parties involved.
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.