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What is a Negative Pledge? A Comprehensive Legal Overview
Definition & Meaning
A negative pledge is a clause in a loan agreement that prevents a borrower from securing additional loans against their assets without the prior consent of the original lender. This clause ensures that the borrower does not pledge any property to another lender, which could diminish the security of the original loan. Essentially, it protects the original lender's interests by maintaining their priority claim over the borrower's assets in case of default.
Table of content
Legal Use & context
Negative pledge clauses are commonly found in unsecured loan agreements, especially in commercial lending. They are used to protect lenders by ensuring that borrowers cannot use their assets as collateral for new loans from other lenders. This clause is particularly relevant in financial and commercial law, where it helps maintain the integrity of the original loan agreement. Users can manage these agreements through legal templates provided by services like US Legal Forms.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1: A business takes out an unsecured loan of $500,000 from Lender A. The loan agreement includes a negative pledge clause that prevents the business from securing a new loan with its equipment as collateral without Lender A's approval.
Example 2: A personal borrower receives an unsecured loan and signs a negative pledge. Later, they attempt to secure a loan against their home without informing the original lender, which violates the negative pledge agreement. (hypothetical example)
State-by-state differences
Examples of state differences (not exhaustive):
State
Notes
California
Negative pledge clauses are enforceable but must be clearly stated in the loan agreement.
New York
Commonly used in commercial lending; courts uphold these clauses as long as they are reasonable.
Texas
Negative pledges are recognized but may be subject to specific state regulations.
This is not a complete list. State laws vary, and users should consult local rules for specific guidance.
Comparison with related terms
Term
Definition
Difference
Negative pledge
A clause preventing the borrower from securing additional loans without consent.
Focuses on prohibiting secured loans.
Secured loan
A loan backed by collateral.
Involves pledging assets as security.
Unsecured loan
A loan not backed by collateral.
Does not require assets for security but may include negative pledges.
Common misunderstandings
What to do if this term applies to you
If you are a borrower and your loan agreement includes a negative pledge, it is crucial to understand its implications. Ensure you do not attempt to secure additional loans against your assets without consulting your original lender. If you need to explore additional financing options, consider discussing your needs with your lender first.
You can also explore ready-to-use legal form templates from US Legal Forms to help you navigate agreements and ensure compliance. If your situation is complex, seeking professional legal advice may be necessary.
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