Commercial Loan Covenants & Annual Reviews
Covenants are the ongoing tests and reporting obligations that sit inside many commercial property loans — and annual reviews are when lenders re-check DSCR, LVR and lease risk.
If you’re planning a purchase or refinance, it’s worth modelling conservative headroom first (use the calculate DSCR and repayments tool). For lender-fit covenant terms, speak with a Commercial Mortgage Broker.
General information only — not financial, legal or tax advice. Always confirm assumptions, fees and lender policy for your scenario.
Talk covenants, reviews & refinance options
1) What commercial loan covenants actually are
In commercial lending, approval is rarely the end of the story. Many facilities are built with covenants — agreed tests and obligations that sit alongside the repayment schedule.
Think of covenants as a risk dashboard for the lender. They help the lender monitor whether the deal is still performing as expected (income, value, lease risk) and prompt early action if it isn’t.
Covenants aren’t “bad” — they’re common in commercial property. The risk is agreeing to covenants you can’t realistically maintain. If you want help stress-testing covenant headroom, speak with a Commercial Mortgage Broker Australia.
Most covenant discussions boil down to two core questions:
- Serviceability: does income still cover debt costs? (DSCR / ICR)
- Security: has the lender’s position moved? (valuation / LVR)
If you want the DSCR mechanics first, see Commercial Loan DSCR explained. If you want the security side, read commercial property LVR & deposits and the valuation process.
2) Common covenants in commercial property lending
Covenant sets vary by lender and deal size, but the following appear frequently in Australian commercial facilities:
| Covenant | What it measures | Why it matters to credit |
|---|---|---|
| LVR covenant | Loan balance compared to current valuation. | If the property value falls (or debt increases), the lender’s risk rises. Tight LVRs can trigger paydown or restructure requests. |
| DSCR / ICR covenant | Income coverage of repayments (DSCR) or interest (ICR). | Signals whether the deal can absorb higher rates, vacancy or expense creep without becoming fragile. |
| Occupancy / WALE | Lease strength, expiry profile and tenant concentration. | Short WALE and concentration increase re-leasing risk, which can pressure both valuation and DSCR. |
| Liquidity / cash buffer | Minimum cash at bank or accessible liquidity. | Buffers reduce the chance a temporary shock (vacancy, capex) becomes a repayment problem. |
| Information covenants | Reporting requirements (financials, rent roll, insurance updates). | Late or missing information is treated as risk — even if the deal is performing. |
Covenant definitions matter. For example, “NOI” for DSCR might be calculated from a rent roll, from bank statements, or from financial accounts — and different inputs can change the result. If you need to understand the underlying lender mechanics, the Commercial Property Finance Guide is the best starting point.
3) Annual reviews: what happens after settlement
Many commercial loans include an annual (or periodic) review. This is where the lender checks whether the original risk assumptions still hold. Reviews are usually administrative when the deal is stable — but they can become consequential if the market, lease or financials have changed.
- Updated financials (tax returns or management accounts)
- BAS and/or bank statements (depending on lender)
- Current rent roll + lease updates (renewals, incentives, arrears)
- Insurance certificates (building, public liability where relevant)
- Confirmation of any material changes to the business or property
- DSCR/ICR using updated income and stressed assumptions
- LVR based on valuation evidence (sometimes triggered, sometimes periodic)
- Lease risk factors: occupancy, WALE, tenant concentration
- Conduct: arrears history and account behaviour
In softer market conditions, valuations and lease expiry profiles receive more scrutiny. If you want context on what lenders are sensitive to right now, read the Commercial Property Market Update.
4) What happens if a covenant is breached?
A covenant breach isn’t automatically a catastrophe — but it is a signal the lender wants addressed. The outcome depends on severity, lender appetite, and whether the borrower engages early with a credible plan.
- Waiver or temporary relief (often with conditions and a re-test date)
- Extra reporting (more frequent financials, updated rent roll, lease evidence)
- Risk repricing (margin adjustment) or tighter structure
- Partial paydown to restore LVR headroom
- Restructure / refinance if the facility no longer fits the risk profile
If breach risk is emerging, you typically have more options before it becomes formal. This is where a refinance strategy (or a negotiated variation) can be valuable — see commercial property refinance.
5) How to negotiate covenant terms (before you sign)
You can’t negotiate away the fundamentals of risk, but you can often negotiate clarity and fairness. The goal is to avoid covenant language that creates “technical breaches” from normal volatility.
- How is DSCR/NOI defined (rent roll vs statements vs financials)?
- Which rate is used for testing (actual vs stressed)?
- How often is testing performed and what triggers an off-cycle review?
- What constitutes acceptable evidence (lease docs, bank statements, arrears reports)?
- Reasonable headroom above expected performance
- Defined cure periods (time to fix, not instant escalation)
- Carve-outs for one-off events where appropriate
- Alignment between covenants and the asset’s normal volatility
If your facility is lease-reliant, the documentation standard is part of the risk discussion. For lending approaches that rely heavily on the lease, read lease-doc vs full-doc commercial loans.
6) Costs to budget for (reviews, valuations and admin)
Annual reviews and covenant monitoring can come with fees — and valuation updates (when required) can be a material cost. If you’re budgeting end-to-end, review commercial property loan costs & fees.
7) Tools & next steps
Use the Commercial Property Calculator to test DSCR under stressed rates and different structures.
The how commercial property loans work guide covers DSCR, LVR, leases and review behaviour.
If the structure is uncertain, start with the Business Loan Eligibility Check.
See a real structure pathway in our SMSF commercial property case study.
Want covenant terms that match the realities of your deal (and don’t create avoidable review risk)? Talk to a Commercial Mortgage Broker.
FAQs
What are covenants in a commercial property loan?
Covenants are ongoing rules or financial tests written into the loan documents. They’re designed to give the lender early warning if risk increases (for example, if DSCR falls or the property value drops). Covenants don’t automatically mean something is wrong — they’re a normal feature of many commercial facilities.
Are covenants only used by non-bank lenders?
No. Banks and non-bank lenders both use covenants, although the types, testing frequency and strictness can differ. Higher-risk deals, higher LVRs, specialised assets, or larger exposures are more likely to come with more detailed covenants and reporting requirements.
What documents do lenders request at annual review?
Common requests include updated financials (company/trust returns or management accounts), BAS, bank statements, current rent roll, lease updates, insurance certificates and confirmation of any material changes. Some lenders also request updated valuation evidence depending on the facility and risk profile.
Do lenders revalue commercial property every year?
Not always. Some lenders only revalue if risk has changed, if you request a restructure, or if a covenant trigger occurs. Others may require periodic valuations (or desktop updates) as part of review. It depends on the lender, asset type and how tight the original LVR was.
What are the most common commercial property covenants?
The big ones are LVR (loan-to-value ratio) and DSCR/ICR (income coverage). Depending on the deal, lenders may also track occupancy, WALE, tenant concentration, liquidity buffers, and information covenants (timely financial reporting and lease updates).
What happens if I breach a covenant?
A breach usually triggers a conversation and a remediation plan — not an immediate default. Outcomes can include a waiver, extra reporting, partial paydown, tighter conditions, or repricing. The earlier you engage (before the breach is formalised), the more options you typically have.
Can covenants be negotiated before settlement?
Often, yes. While you can’t remove risk, you can sometimes negotiate definitions, testing frequency, headroom, cure periods, and which income/expenses are included. Clear definitions matter because small wording differences can change the DSCR or LVR outcome.
How do covenants relate to DSCR and valuation risk?
Covenants are usually tied to the same drivers lenders care about at approval: serviceability (DSCR) and security (valuation/LVR). If the market softens, a lower valuation can tighten LVR; if cash flow weakens, DSCR can fall. Building buffers up front reduces review stress.
Is refinancing a solution to tough covenants?
It can be, but it depends on whether the underlying numbers support a new facility. If DSCR or LVR has deteriorated, refinancing may still be possible with the right lender and structure, but it can also be more expensive. Start by modelling and getting a lender-fit strategy.