A collateral covenant pertains to a commitment made in a contract or deed that is associated with the subject matter being transferred or sold, but not directly related to it. To illustrate, in a property deed, a collateral covenant could be an assurance to uphold the lawn or refrain from constructing a fence above a specific height. Such a covenant does not impact the possession of the property, but rather its utilization or upkeep.
A collateral covenant is a covenant that is made in connection with the grant of something, but it does not directly relate to the thing that is granted. It is typically found in a deed or other sealed instrument and does not pertain to the property that is conveyed. This type of covenant is distinct from an inherent covenant, which directly relates to the land itself. For instance, a collateral covenant could be a promise made by a borrower to a lender to maintain a specific credit score or to provide additional collateral if the borrower’s financial situation worsens. These promises do not directly relate to the property that is being financed, but instead, they are additional obligations that the borrower agrees to in order to secure the loan.
A collateral covenant is a legal agreement that requires a borrower to pledge specific assets as collateral for a loan.
Common types of collateral include real estate, vehicles, equipment, and inventory.
Lenders require collateral covenants to reduce their risk of loss in the event that a borrower defaults on a loan.
If a borrower defaults on a loan with a collateral covenant, the lender can seize the pledged assets and sell them to recover the outstanding debt.
Yes, a borrower can negotiate the terms of a collateral covenant with a lender, such as the type of assets that can be used as collateral and the value of the collateral.
Yes, there are risks associated with pledging assets as collateral, such as the possibility of losing the assets if the borrower defaults on the loan.
It depends on the terms of the collateral covenant. Some agreements allow the borrower to continue using the assets, while others restrict their use.
The duration of a collateral covenant depends on the terms of the agreement, but it typically lasts for the duration of the loan.
A borrower cannot terminate a collateral covenant without the lender’s consent, but they can negotiate changes to the terms of the agreement.
If a borrower is unable to meet the terms of a collateral covenant, they should contact the lender as soon as possible to discuss their options, such as renegotiating the terms of the agreement or seeking alternative financing.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 17th April 2024.
To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.
- Page URL:https://dlssolicitors.com/define/collateral-covenant/
- Modern Language Association (MLA):Collateral Covenant. dlssolicitors.com. DLS Solicitors. May 09 2024 https://dlssolicitors.com/define/collateral-covenant/.
- Chicago Manual of Style (CMS):Collateral Covenant. dlssolicitors.com. DLS Solicitors. https://dlssolicitors.com/define/collateral-covenant/ (accessed: May 09 2024).
- American Psychological Association (APA):Collateral Covenant. dlssolicitors.com. Retrieved May 09 2024, from dlssolicitors.com website: https://dlssolicitors.com/define/collateral-covenant/
Our team of professionals are based in Alderley Edge, Cheshire. We offer clear, specialist legal advice in all matters relating to Family Law, Wills, Trusts, Probate, Lasting Power of Attorney and Court of Protection.
All author posts