What happens if you breach a loan covenant?

Breaching a loan covenant starts a sequence defined by the loan documents: the breach itself, notice (from either side), any cure period the documents allow, and, if the breach is not cured or waived, an event of default that opens up the lender's remedies. Payments being current does not prevent any of this. A covenant breach with a spotless payment history is still a breach.

Is a covenant breach the same as a default?

Not immediately, in most loan documents. A breach of a financial or reporting covenant while payments are current is commonly called a technical default, as opposed to a monetary default, which is a missed payment. Many agreements give a technical default a notice-and-cure path, meaning a defined window to fix the problem or deliver the missing item, before it ripens into an event of default. But not every covenant gets a cure period, and some breaches, like unauthorized transfers, are often immediate events of default. The only reliable answer is in each loan's own documents, which is one reason a portfolio of commercial real estate loan covenants needs to be tracked with each covenant's cure terms attached.

What can the lender do after a breach?

The loan documents give the lender a menu, and the lender chooses from it. Typical responses, roughly in order of severity: waive the breach (often for a fee), amend the covenant going forward, trigger cash management or a lockbox so property cash flows through lender-controlled accounts, impose default-rate interest, or accelerate the loan. For a DSCR covenant shortfall, many loans specify a cash-sweep response rather than acceleration, which is painful but survivable. Acceleration over a first technical default is rare in practice, but everything on the menu is contractually available, and the choice belongs to the lender, not the borrower.

What is a covenant waiver?

A waiver is the lender's written agreement not to exercise remedies for a specific breach, usually for a specific period, sometimes with conditions or a fee. Waiver requests are far easier conversations when the borrower initiates them early with the numbers already in hand: which covenant, how large the shortfall, why it happened, and what the next two quarters look like. That preparation is the practical difference between a borrower who tracks covenant headroom each period and one who discovers the breach while preparing the annual compliance certificate.

Why does finding the breach first matter so much?

Because every path after a breach goes better with lead time, whether that path is cure, waiver, or amendment, and because some breaches are silent. A missed reporting deliverable is frequently its own default event regardless of covenant health, and a ratio that slipped under its floor mid-year produces no alert of its own in a spreadsheet nobody recalculated. TractTerm, part of Composed Studio, exists for exactly this situation: covenant headroom computed on each loan's own test cadence, breach flags, and portfolio-wide compliance risk ranked by severity, so the borrower is the first to know instead of the last. TractTerm computes the tests from the terms and financials you enter. Whether a covenant is satisfied remains the lender's determination, and TractTerm cannot guarantee an outcome with any lender; what it changes is when you find out.