Loan and contract financial covenants

Many commercial contracts and loan agreements contain financial covenants that parties must comply with after signing. These may include financial performance requirements, earn-out provisions, milestones for payment of deferred consideration, warranties provided by sellers and other financial obligations.

We help parties assess their options when they face a potential or actual breach of financial covenants, including where the breach is technical rather than a reflection of wider financial difficulties.

Loan agreement financial covenants

Borrowers should assess whether they are at risk of breaching their loan agreements. Reduced cash flow may result in missed repayments or breaches of financial covenants. Loan agreements may also require borrowers to notify lenders of material adverse changes or other specified events.

Depending on the agreement, a breach may trigger default provisions, potentially allowing the lender to demand repayment or take other enforcement action.

The appropriate response depends on the terms of the loan and the circumstances. Early disclosure and open communication may provide an opportunity to negotiate a waiver or amendment. Lenders may prefer to agree revised terms that support repayment over time rather than accelerate the debt, although this will depend on their commercial and legal position.

Where the breach reflects more serious financial difficulties, business restructuring or the sale of part of the business may also need to be considered.

Breach of contractual warranties about performance

Warranties are statements of fact given by one party to another and are common in commercial contracts. If a warranty proves to be untrue, the other party may be entitled to claim damages or rely on an indemnity, where applicable. Termination may also be available, depending on the contract and the nature of the breach.

Warranties concerning the absence of material changes since the last accounts, or known or threatened breaches of material contracts by the business, its customers or suppliers, can become particularly problematic during periods of economic uncertainty. It is important to assess the wording of the warranty, any relevant disclosures and the remedies available before deciding how to respond.

Potential for renegotiation

Where a financial covenant has become difficult or impossible to meet, renegotiation may offer a practical solution. Although a counterparty will not generally be obliged to amend the contract, it may agree to changes where these are commercially preferable to enforcement or a dispute.

Depending on the circumstances, this could involve adjusting financial targets, extending deadlines, revising performance requirements or agreeing a waiver of a particular breach. Any agreement should be properly documented, including its effect on existing and future defaults.

Gannons provides strategic support on commercial contracts and disputes, helping businesses assess covenant breaches, negotiate revised terms and manage the associated legal and commercial risks. Contact us on 0207 438 1060 to discuss your options.