Loan Covenants Explained – Avoiding Traps in Your Commercial Mortgage Agreement

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Loan Covenants Explained – Avoiding Traps in Your Commercial Mortgage Agreement

Loan covenants are one of the least understood parts of a commercial mortgage agreement. Many landlords focus on rate and loan size but overlook the conditions that govern how the facility must be managed. Breaching a covenant can trigger penalties, force refinancing, or even give the lender rights to call in the loan. Understanding covenants – and negotiating them carefully – is essential to protecting your portfolio.

What Are Loan Covenants?

A loan covenant is a condition in the loan agreement that requires the borrower to meet certain financial or operational obligations. They are designed to give lenders confidence that the loan remains sustainable throughout its term.

Covenants usually fall into two categories:

• Financial covenants – such as maintaining minimum interest cover, maximum loan-to-value ratios, or liquidity reserves.
• Non-financial covenants – such as restrictions on additional borrowing, reporting requirements, or obligations to maintain insurance and property condition.

Common Covenant Traps

• Unrealistic interest cover ratios – set at levels that are difficult to maintain if interest rates rise or rents fall.
• Rigid loan-to-value triggers – which may require capital injection if property values dip, even temporarily.
• Restrictive reporting – quarterly reporting requirements that create administrative burden without adding real value.
• Limitations on flexibility – such as prohibitions on refinancing or selling properties within the portfolio without lender consent.

Why Lenders Use Them

Covenants exist to protect lenders, ensuring early warning signs are spotted before defaults occur. However, poorly negotiated covenants can unfairly restrict landlords, reduce flexibility, and increase financial risk unnecessarily.

Practical Examples

• A landlord agrees to a covenant requiring a minimum 150% interest cover. When interest rates rise, they fall into technical breach despite continuing to meet monthly payments.
• A portfolio owner accepts an LTV covenant at 65%. A temporary fall in valuation forces them to inject cash or refinance, even though rental income remains stable.
• An HMO operator faces delays expanding their business because the facility prohibits further borrowing without lender approval.

How to Negotiate Better Terms

Covenants are not set in stone. With professional guidance, landlords can often negotiate:

• More realistic interest cover ratios, aligned with actual portfolio performance.
• Higher LTV thresholds or flexibility during valuation downturns.
• Annual rather than quarterly reporting to reduce administrative load.
• Clear carve-outs for routine refinancing or disposals.

The Role of NACFB Brokers

NACFB brokers ensure covenants are commercially workable. They know which lenders are flexible, how to present a case for more realistic terms, and how to protect landlords from traps hidden in the small print. Their oversight ensures that finance supports growth rather than restricting it.

Conclusion and Takeaway

Loan covenants are just as important as rates and terms in a commercial mortgage agreement. Landlords who understand and negotiate them properly avoid unnecessary risks and protect their flexibility. With the right broker, covenants can be structured to balance lender security with landlord freedom.

Next Steps

If you would like an NACFB broker to review or negotiate covenant terms on your next finance deal, please complete the short form below and a consultant will be in touch.

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Published: 10 December 2025

The post Loan Covenants Explained – Avoiding Traps in Your Commercial Mortgage Agreement appeared first on Property118.

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