Negative Pledge Law and Legal Definition
In a non secure loan agreement, negative pledge clause is added to prevent a borrower from obtaining any secured loan with an unsecured lender’s permission. This clause creates an agreement that a borrower will not pledge any property to another person because it will result in less security to the unsecured lender.
Negative pledge clauses give priority claims to a lender over the borrower’s assets. Negative pledge clauses are common in unsecured commercial loan document. The clause is added to ensure that a borrower, who has already taken an unsecured loan, cannot later take out another loan with a different lender by securing the subsequent loan on the specified assets. If the borrower is allowed to do this, the original lender would be disadvantaged because the subsequent lender would have first call on the assets in an event of default.