Covenant Baskets and Carveouts
The two exceptions that give a restricted party room to operate under a negative covenant, and how to size them so they are actually usable.
- Whether each negative covenant has usable exceptions
- Whether basket amounts match the business plan
- Whether ordinary-course activity is carved out
- Whether one transaction can consume an entire basket
If this clause already feels aggressive in isolation, upload the full contract and see how it combines with payment terms, liabilities, and exit rights.
Analyze My ContractWhat this clause actually does
Negative covenants usually start as flat prohibitions. Two exceptions soften them. A carveout removes part of the restriction, the pattern being thou shalt not do A through Z, but thou shalt be permitted to do Y. A basket permits deviation up to a specified amount, often a dollar figure, for example permission to sell obsolete equipment in the ordinary course up to one million dollars.
Why people get burned by this clause
Without workable baskets and carveouts, a borrower or restricted party can be in technical default just by running its business normally, or can run out of room after one ordinary transaction.
What should make you slow down
- A flat negative covenant with no basket or carveout
- A basket too small for the party's real operating needs
- A basket that a single early transaction can exhaust, leaving no room later
- Baskets not sized against the party's own projections
Where you usually see it
- Credit agreements
- Bond indentures
- Acquisition agreements with interim covenants
What the platform checks in the live contract
- Whether each negative covenant has usable exceptions
- Whether basket amounts match the business plan
- Whether ordinary-course activity is carved out
- Whether one transaction can consume an entire basket
What to test against your deal
- Baskets are sized to the party's projections
- Ordinary-course activity is carved out by category
- Important restrictions pair a category carveout with a dollar basket
- Baskets refresh or are large enough to cover the term
Definitions worth opening next
Clause pages that share the risk pattern
Articles that go deeper
Baskets and carveouts are what make a negative covenant livable. A carveout removes part of a restriction, a basket allows deviation up to a capped amount. If they are missing or too small, normal operations can trigger default. Size them against the real business plan.
See how this clause behaves in the real contract.
The clause library gives you a starting point. Document analysis can surface relevant language, show related sections, and organize risk signals and follow-up questions for review against the source file.