CHAPTER 9.01. Breach of Covenants

• Jurisdiction: United States

9.01. Breach of Covenants

Modern mortgages and other loan documents generally contain covenants of the borrower or mortgagor covering a wide variety of operational, financial, ownership, and procedural obligations.¹ These range from the most basic, such as an obligation to make principal and interest payments to the lender, to the more complex, such as an obligation to maintain a certain ratio of income to debt service. While some covenants are purely payment obligations, such as for debt service or taxes, many are performance obligations. In addition, these performance obligations may be negative covenants, such as a covenant not to commit waste or not to transfer or encumber the collateral; or affirmative covenants, such as an obligation to keep books and records, pay property taxes, or keep the property in good repair. Generally, these covenants appear in the loan documents because it is not always clear whether the borrower will have these obligations under common law. For example, although there may be a common law duty not to permit waste, the borrower probably has no affirmative duty to keep the property in any particular condition of repair until the lack of repair turns into waste.²

This is not to say that courts will always enforce the covenants as written. Courts may impose a test of materiality or reasonableness on the alleged default and its remedy. For example, a court might not enforce a covenant to repair absent showing a material diminution in the value of the collateral.³ Although it is difficult to find support in Delaware for such a requirement, there are hints in Delaware case law that a Delaware court might not permit acceleration for an immaterial or technical breach. In Jeffery v. Seven Seventeen Corp., for example, the Delaware Supreme Court, while observing that a lender may accelerate a mortgage for default in the payment of property taxes on the collateral, noted that this result was...