Other covenants: Overview, definition, and example
What are other covenants?
"Other covenants" refer to additional promises or obligations that one or both parties agree to fulfill under a contract. These covenants typically go beyond standard representations and warranties, covering specific actions, restrictions, or requirements that must be adhered to during the term of the agreement.
For example, in a loan agreement, a borrower might agree to maintain a certain level of insurance coverage or provide periodic financial reports as part of the covenants.
Why are other covenants important?
Other covenants are important because they define the ongoing obligations of the parties, ensuring clarity and accountability throughout the duration of the contract. They provide mechanisms to safeguard the interests of one or both parties, such as maintaining financial stability, complying with legal requirements, or protecting shared resources.
For lenders, investors, or other counterparties, covenants can serve as safeguards, helping to monitor the other party’s performance and reducing the risk of default or non-compliance. For the party agreeing to the covenants, these obligations are a way to build trust and demonstrate commitment to the terms of the contract.
Understanding other covenants through an example
Imagine a company enters into a loan agreement with a bank. The "other covenants" section of the contract might include promises to maintain a minimum debt-to-equity ratio, not to incur additional debt without the lender’s approval, or to provide audited financial statements annually. These covenants protect the lender by ensuring the borrower remains financially stable and transparent.
In another scenario, a franchise agreement might include covenants requiring the franchisee to follow specific branding guidelines, complete periodic training, or purchase supplies exclusively from the franchisor. These covenants ensure consistency and protect the franchisor’s brand.
An example of an other covenants clause
Here’s how an "other covenants" clause might appear in a contract:
“The Borrower agrees to comply with the following covenants: (i) maintain a minimum Current Ratio of 1.25:1; (ii) refrain from incurring any additional indebtedness exceeding $50,000 without the prior written consent of the Lender; and (iii) provide quarterly financial statements within 30 days of each quarter-end.”
Conclusion
"Other covenants" set out specific, ongoing obligations that help ensure transparency, accountability, and adherence to the terms of the agreement. They play a vital role in protecting the interests of the parties involved and ensuring the successful execution of the contract. For businesses, understanding and negotiating these covenants is essential to balancing obligations with operational flexibility.
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.