Negative Covenant in Australia: Meaning, Impact & 2025 Trends

In the complex world of Australian finance, loan agreements and investment contracts are peppered with legal clauses that can make or break a deal. Among the most crucial of these are negative covenants—restrictions that lenders or investors impose on borrowers to protect their interests. As financial markets evolve in 2025, understanding these covenants is more important than ever, whether you’re a business owner, property investor, or simply navigating personal finance.

What Is a Negative Covenant?

A negative covenant is a contractual promise that limits certain actions by the borrower or the company. Unlike positive covenants, which require a party to do something (like maintain insurance), negative covenants are about what not to do. Common in loan agreements, bonds, and even business contracts, they’re designed to reduce risk for lenders and investors by keeping the borrower’s behaviour within agreed boundaries.

• Examples: Prohibiting additional borrowing, restricting asset sales, or limiting dividend payments.

• Purpose: Preserve the borrower’s financial health and ensure they remain able to repay or perform.

In Australia, negative covenants have become a standard feature in both corporate and property finance. They’re also gaining prominence in consumer lending, especially as economic conditions remain volatile post-pandemic and regulatory scrutiny increases.

Why Negative Covenants Matter in 2025

With the Reserve Bank of Australia (RBA) holding rates steady after a period of rapid hikes, lenders are more focused than ever on managing risk. In 2025, several key trends are shaping the use and enforcement of negative covenants:

• Rising Corporate Debt: Australian businesses are borrowing to invest and expand, but lenders want assurances that companies won’t take on too much risk.

• Property Market Adjustments: As property prices cool in major cities, banks are tightening loan conditions, often adding more restrictive covenants to commercial and development loans.

• Regulatory Pressure: APRA and ASIC are scrutinising lending practices, encouraging banks to apply more rigorous controls—negative covenants included—to protect the stability of the financial system.

For example, in 2025, a mid-sized construction firm in Melbourne seeking a $10 million loan might face covenants preventing it from taking on further debt or selling key equipment without lender approval. Similarly, a property developer could be barred from launching new projects until existing loans are repaid, ensuring the lender’s exposure remains contained.

Impacts on Borrowers and Investors

Negative covenants aren’t just legal fine print—they directly impact how businesses and individuals can operate and grow. Here’s how:

• Borrowers: May find their flexibility reduced. Want to expand by acquiring a competitor? A negative covenant might require lender sign-off. Thinking of selling underperforming assets? Restrictions could apply.

• Investors: Use negative covenants as a risk management tool. Bondholders, for instance, often demand these clauses to prevent companies from over-leveraging or paying out excessive dividends, preserving value and credit quality.

• SMEs and Startups: May negotiate to soften covenants or include ‘cure periods’—windows to fix breaches without penalty, especially as access to capital becomes more competitive in 2025.

Failure to comply with a negative covenant can trigger severe consequences: increased interest rates, loan recalls, or even default, impacting credit ratings and future borrowing capacity.

Negotiating and Navigating Negative Covenants

In 2025’s cautious lending climate, negotiating the right balance is key. Here’s what savvy borrowers and investors are doing:

• Prioritising Transparency: Detailed financial reporting helps build trust and flexibility with lenders.

• Customising Covenants: Borrowers are pushing for covenants tailored to their business models, rather than one-size-fits-all restrictions.

• Monitoring Compliance: New fintech tools allow real-time tracking of covenant compliance, reducing the risk of accidental breaches.

• Legal Expertise: Engaging specialist finance lawyers to ensure terms are clear and manageable, and to negotiate carve-outs where needed.

With Australia’s economic outlook stabilising, lenders are willing to be flexible for strong borrowers—if the risks are well-managed and negative covenants are respected.