As a member of Murtha Cullina`s Business and Finance department, Ms. D`Angelo represents clients in the areas of corporate law, real estate and finance. It helps clients with real estate purchases, development, tax credits, financing and training. Negative deposit clauses are almost universal in modern unsecured commercial credit documents. The objective is to ensure that a borrower who has taken out an unsecured loan can no longer borrow from another lender at a later date to secure the subsequent credit on the declared assets. If the borrower could do so, the original lender would be at a disadvantage, as the subsequent lender would first use the assets in the event of default. While a negative promise is not a security tool, it can be useful in the appropriate context, provided a lender recognizes its limitations. Among the advantages of a negative promise is its flexibility and the ease with which it can be included in any financing agreement. Contrary to the interest of security, it is not necessary to respect local laws regarding form, content or presentation/recording. The disadvantages of a negative promise arise from the fact that it is not a security interest or a recognized pledge. While negative liabilities have not worked well in litigation against third parties (they still constitute a violation of contractual rights against the debtor himself), lenders use them as a means of tarnishing the ownership of assets and, normally, a serious lender or buyer would not enter into a transaction with a debtor/seller who, for fear of a possible lengthy litigation, shares it against a known negative.
If a negative promise is to be used, a key factor is the knowledge of the third party. In order to offer the best chance of success against a subsequent third party, the existence of negative collateral should be published by filing/registering a notification of the existence of negative collateral at the UCC filing offices responsible for negative personal property commitments and in applicable land records for negative pledges of real estate.