Covenants of buyer: Overview, definition, and example
What are covenants of the buyer?
Covenants of the buyer are promises or commitments made by the buyer in a contract or agreement. These covenants outline the buyer's obligations and responsibilities throughout the transaction or agreement, ensuring that they act in good faith and fulfill certain conditions. These could involve actions the buyer must take (affirmative covenants) or restrictions on what the buyer can do (negative covenants). They are designed to protect the interests of the seller and ensure that the buyer meets agreed-upon terms.
For example, if your business is purchasing property, a covenant might require you to maintain the property in a certain condition or avoid making changes to the property without the seller’s approval.
Why are covenants of the buyer important?
Covenants of the buyer are important because they ensure that the buyer’s actions are in line with the agreed terms, protecting the seller’s interests and ensuring the transaction goes smoothly. By clearly outlining the buyer's responsibilities, covenants help prevent disputes and misunderstandings, and provide a legal basis for action if the buyer fails to meet their obligations.
For SMBs, understanding covenants of the buyer is crucial when negotiating purchases or entering into agreements, as they help ensure that the buyer remains compliant with the terms of the agreement and that the deal proceeds as planned.
Understanding covenants of the buyer through an example
Imagine your small business is purchasing equipment from a supplier, and the contract includes a covenant that requires you to maintain the equipment in good working condition for a certain period. If the equipment breaks down or needs repairs, you are required to notify the supplier immediately and follow specific maintenance protocols as agreed in the contract. Failure to comply with this covenant could result in penalties or additional costs.
In another example, your business may enter into an agreement to buy a building. The covenant of the buyer might require you to keep the building insured against damage for the duration of the ownership or restrict you from making any major alterations without prior approval from the seller.
An example of covenants of the buyer in action
Here’s how covenants of the buyer might be referenced in a sales agreement:
“The buyer agrees to maintain the purchased property in good repair, obtain insurance coverage for the property, and notify the seller of any significant changes to the condition of the property within 30 days of occurrence.”
Conclusion
Covenants of the buyer are promises or commitments made by the buyer in a contract to ensure that they fulfill their obligations and adhere to the agreed-upon terms. For SMBs, understanding and negotiating these covenants is essential to protect the interests of both parties, ensure smooth transactions, and avoid disputes. Clear covenants help businesses stay compliant and maintain positive relationships with sellers or other parties involved in the deal.
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.