covenant

1) A promise made in a deed, which may or may not be under seal. Such a promise can be enforced by the parties to it as a contract, even if the promise is gratuitous: for example, if A covenants to pay B £100 per month, B can enforce this promise even without having done anything in return. Covenants were formerly used to minimize income tax by transferring income from taxpayers to non-taxpayers, such as children or charities; however, only gifts made to charities now offer much scope for tax planning (see deed of covenant, gift aid).

Covenants may be entered into concerning the use of land, frequently to restrict the activities of a new owner or tenant (e.g. a covenant not to sell alcohol or run a fish-and-chip shop). Such covenants may be enforceable by persons deriving title from the original parties. This is an exception to the general rule that a contract cannot bind persons who are not parties to it.

2) An undertaking in loan agreement, the breaching of which will make the loan repayable immediately. The undertakings in such an agreement can be classified as either ratio covenants or non-ratio covenants. The breaching of either type of covenant will be an event of default