Time is of the essence of all undertakings là gì năm 2024

A negative pledge clause is a type of negative covenant that prevents a borrower from pledging any assets if doing so would jeopardize the lender’s security. This type of clause may be part of bond indentures and traditional loan structures.

Key Takeaways

• A negative pledge clause is a part of a loan contract that prevents the borrower from pledging their assets to another lender.
• Negative pledge clauses are also referred to as "covenants of equal coverage."
• Negative pledge clauses may stipulate that if the bond issuer grants liens against any assets in the future, an equal lien must also be granted to the issuer’s investors.
• A negative pledge clause ensures that the original lender will maintain priority if the borrower defaults and their assets are seized.
• Negative pledge clauses are sometimes included in mortgages to prevent the borrower from using their home as collateral for other lenders.

How a Negative Pledge Clause Works

Negative pledge clauses help lenders or bondholders protect their investments. When a bond indenture includes a negative pledge clause, it prevents the bond issuer from taking on future debt that could compromise its ability to meet obligations to existing bondholders.

A negative pledge clause also limits the likelihood that a particular asset will be pledged more than once, preventing conflict over which lending institution has the right to the asset if the borrower defaults.

Mortgages sometimes include negative pledge clauses that prevent the borrower from encumbering their home.

Advantages and Disadvantages of a Negative Pledge Clause

Because a negative pledge clause reduces the risk of a loan or bond issue, it often allows the borrower to get a slightly lower interest rate. This creates a win-win situation that benefits both the lender and borrower.

The negative pledge clause mitigates risks to bondholders by restricting the activities in which the issuer can participate. Most often, this means preventing the issuer from using the same assets to secure another debt obligation.

On the downside, violating a negative pledge clause can trigger a default on the loan, albeit a technical default. Lenders generally give an allotted amount of time, such as 30 days, to remedy a covenant break before moving ahead with default procedures.

Pros and Cons of a Negative Pledge Clause

Pros

• Lowers risk for the lender
• Lower interest rates for the borrower
• Ensures that lenders will have recourse if the borrower declares bankruptcy

Cons

• Limits the borrower's ability to sell or borrow against their assets in the future.
• May cause borrower to default if they inadvertently break the covenant.
• They are difficult to enforce for lenders.

Special Considerations

When a financial institution provides an unsecured loan to an individual or entity, it may include a negative pledge clause in the contract in order to protect itself.

In this case, the clause prevents the borrower from using its own assets to secure other sources of financing. If the borrower secures other loans, the original loan by the first institution becomes less secure, because the borrower now has a greater amount of debt obligations, and the original institution may not have priority status for repayment.

In the case of home mortgages, many loan agreements include terminology that restricts the borrower from using the mortgaged property as collateral against any new loan, except in the case of refinancing.

What Is a Negative Covenant?

A negative covenant is a contractual agreement that binds prevents one party from taking a certain action. In other words, it is an agreement not to do something. Negative covenants might prohibit a person or company from selling certain assets or taking on more than a certain amount of debt, for example.

“Time is of the essence” is a contractual term that requires timely completion of a task. If timely completion of the task does not occur, then the other party to the contract will have rights against the defaulting party.

The most common exposure that people will have to this is if they are buying and selling property in Queensland. The standard Queensland conveyancing contracts state that time is of the essence. This means that if a party doesn’t do what they were supposed to be the due date in the contract, then the other party is entitled to terminate the contract. Examples of this include if the buyer doesn’t obtain finance approval or the seller is not ready to settle by the due date. In some situations, the defaulting party may be liable to the other party for costs and compensation.

The fact that there may have been delays outside the defaulting party’s control is not considered when time remains of the essence. An example of this is if a buyer’s bank cannot arrange a valuation in time to secure their finance application. In some cases, the parties may agree to extend the due date for performance of tasks, but this has to be by mutual agreement.

Time is not always of the essence. If it is not expressly stated in the contract, then it is likely to be the case that the parties have a reasonable time to perform the task. In some other states of Australia, there is no express requirement of time being of the essence in conveyancing contracts.

If you enter a contract in which time is of the essence, you must ensure that an adequate time frame has been negotiated to allow you to perform your contractual obligations. You also need to attend to these obligations promptly.

Whether you need assistance with conveyancing or contractual and commercial matters generally, please contact us to arrange a consultation with one of our solicitors.

This post is general information only. It is not a substitute for legal advice from a lawyer. If you have a legal issue, you should always contact your lawyer to obtain advice that is relevant to your circumstances.