# Borrower covenants on transfers, liens and new debt

Canonical: https://commercialdebtadvisory.com/structure/borrower-covenants-on-transfers-liens-and-additional-debt/
Status: Published
Publisher: Jaken Finance Group

Before a borrower changes ownership, grants a lien or incurs new debt, it should identify the financing provisions that govern that action. The economic size of a transaction does not determine whether it is permitted. A small secured obligation may create a different issue from a larger permitted operating payable.

The goal is a repeatable decision process that reaches the right reviewer before the borrower becomes committed. Start with a plain description of the proposed action, the entities involved, amount, collateral, timing and intended control change. Then connect those facts to the documents rather than asking a vague question such as “Can we do this?”

## Read the exception and the restriction together

The [June 1, 2022 Block 40 agreement](https://www.sec.gov/Archives/edgar/data/1795851/000166357726000199/ex10_30.htm) addresses transfers and liens in Sections 4.2 and 4.3. This historical agreement illustrates why the controlling provisions must be read; it does not establish another borrower's permitted actions.

Have counsel identify the relevant defined terms, exceptions, aggregation rules, notice requirements and consent authority. A permitted transfer may still require documentation or continuing ownership by a specified party. A permitted debt category may have amount, purpose, maturity or payment-status conditions. Satisfying one condition does not waive the others.

Include indirect changes where the documents require them. A transfer at a parent entity can matter even when the property-owning entity remains unchanged. Conversely, do not assume every internal reorganization is prohibited; determine the actual rule and any available exception.

## Worked exhibit: three actions, three different tests

Assume an invented loan allows ordinary unsecured trade payables up to $100,000 outstanding, subject to additional stated conditions. It permits certain cumulative ownership transfers up to 20% only if control does not change. Any new voluntary lien outside specified exceptions requires prior written consent. These are hypothetical terms, not customary lender limits.

| Proposed action | Facts to test | Initial result under invented terms |
|---|---|---|
| Add $30,000 of qualifying trade payables | $85,000 already outstanding | Total $115,000 exceeds the amount condition by $15,000 |
| Transfer an additional 9% ownership interest | 12% previously counted under the cumulative rule | Total 21% exceeds the stated 20% exception |
| Finance $35,000 of equipment with a new lien | No applicable lien exception established | Consent review required despite the small dollar amount |

The table identifies issues, not final legal conclusions. The payables must actually fit the defined category. The ownership percentages must be measured using the agreement's method. The equipment arrangement must be classified correctly, including any relevant existing rights or exceptions.

Paying $15,000 of the existing payables would reduce the illustrative amount total to $100,000 if completed and properly recognized before the new obligation is incurred. That arithmetic does not establish permission: the other conditions and timing still require review. Do not count a planned payment as an accomplished reduction.

Likewise, a 21% cumulative transfer is not cured by describing the latest 9% transfer in isolation. Preserve the earlier transfer record and determine whether the agreement resets, aggregates or excludes particular changes. An analyst should not invent a new measurement period to make an exception appear satisfied.

## Use an action-to-approval record

For each proposal, record the business purpose, precise legal entities, applicable clauses, exception analysis, required notice or consent, decision maker, submitted evidence and effective approval date. Add the transaction deadline and any cost of delay. The record should show whether approval is pending, conditional or complete.

Ownership changes may require an updated organizational chart, governing documents, authority evidence and information about incoming owners. Additional debt may require a term sheet, repayment schedule, collateral description and analysis of cash-flow effects. A lien request may require coordination with existing creditors and title or filing professionals. Use the actual lender checklist rather than assuming these examples are exhaustive.

Keep the proposed transaction terms stable while approval is sought. If the amount, parties, collateral or control rights change, determine whether the approval still covers the revised action. An approval for unsecured financing should not be assumed to authorize a later security interest.

## Review consequences before signing

Some actions can affect more than one provision: a new secured loan may implicate debt limits, lien restrictions, cash-management rules and recourse exceptions. A transfer can involve change-of-control language, guarantor requirements and servicing approvals. Map all relevant provisions so resolving one does not leave another untreated.

Ask who can bind the lender and what form of consent is required. A relationship manager's willingness to consider a proposal is different from an effective approval. Preserve conditions, expiration dates and any required amendments. If counsel identifies an ambiguity, resolve it before the borrower relies on the exception.

Where an action has already occurred, document the facts accurately and seek advice promptly. Do not backdate consent, omit the transaction from reporting or assume reversal eliminates every consequence. The appropriate response depends on the documents, law and lender's authorized position.

## Maintain the record after closing

Update ownership, debt and lien schedules when approved actions complete. Retain evidence of payments, releases and filings so the next review begins with current facts. Reconcile the schedules with periodic certifications and financial statements; inconsistent records can create avoidable questions about an otherwise permitted transaction.

The completed process should let a borrower distinguish a permitted action, an action requiring notice, an action requiring consent and an unresolved proposal. That clarity supports ordinary business activity while preventing an informal assumption from becoming an unintended financing problem.


## Source references
- [SEC-filed Block 40 loan agreement, June 1, 2022](https://www.sec.gov/Archives/edgar/data/1795851/000166357726000199/ex10_30.htm) — Sections 4.2 and 4.3: transfers and liens · Checked 2026-10-21 · Historical individual agreement; numerical exceptions and scenarios are invented.