Clean Up Clause in Loan and Credit Agreements

Key Takeaways

• A clean up clause is a provision in a loan or credit agreement requiring the borrower to pay off outstanding balances and keep the account at zero for a set period, helping lenders avoid perpetual debt cycles.
• These clauses can include restrictions on overdraft fees, credit utilization limits, and specific periods for maintaining a zero balance.
• In acquisition finance, a cleanup period gives borrowers time to correct certain breaches in acquired companies without triggering default.
• While less common today, clean up clauses remain useful for managing credit risk and ensuring borrowers use revenue rather than continuous borrowing to cover recurring expenses.
• Best practices for drafting or reviewing a clean up clause include defining the clean-up period clearly, outlining repayment expectations, and understanding how it applies to both loans and revolving credit.

A cleanup clause is a set of requirements that can be included in a financial contract pertaining to a line of credit. They are used as a means to prevent borrowers from using their credit as a source of permanent or long-term financing.

Definition of Cleanup Requirement

Cleanup requirements are conditions that are normally written into a contract involving lines of credit that renew on an annual basis. These require borrowers to pay off outstanding balances on their credit line and cease to further utilize their credit for a set period of time. A cleanup requirement is typically used as a way to prevent a borrower from utilizing their credit as a means of permanent or long-term financing.

It is worth noting that cleanup requirements are becoming less and less commonly used by most banks these days. Many lenders don't see a need to require their customers to clean up their credit so long as interest and principal payments are made in a timely manner. Cleanup requirements are also sometimes known as "annual cleanup." The thought process behind a cleanup requirement is usually to make sure businesses don't rely too much on their credit and that their sales revenue is serving as their primary income source.

Without restrictions like this in place, it is possible that a company might use their credit rather than the earnings they are generating to pay recurring costs such as the following:

• Payroll
• Rent
• Utilities

When a company is relying on their line of credit to pay these recurring costs, it may be a good indication that they are not generating enough revenue to sustain their business or pay off debts. This can potentially lead to a cycle in which a company obtains one line of credit after another to pay their bills, rather than generating the necessary income to do so. This cycle can continue until the company has exhausted all of their options for credit.

The terms included in a cleanup requirement can call for borrowers to clear out their balance and maintain a zero balance for up to 90 days over a 12-month period. Other requirements in a cleanup clause may state that a customer can't incur any overdraft fees for 30 to 60 days in a year while they utilize a revolving line of credit. They may also require that the current outstanding balance stays within a certain limit.

A customer may find themselves required to keep their principle balance below a specified percentage of their full credit line, for example, which will ultimately force them to either pay down their balance or restrict their use of the credit line to keep the balance within those restrictions. Cleanup requirements can be used to help a financial institution reduce potential exposure by offering a measure of certainty that their clients are not accruing debt that they will ultimately be unable to repay.

In terms of acquisition finance, a cleanup period is the period of time during which a borrower has the opportunity to remedy events that relate to a group of companies that have been acquired and are in breach of the terms of the facility agreement that documents the facilities that were used to provide funding for the acquisition. In broad terms, events such as this won't be considered default events during the course of the cleanup period as long as the following conditions are met:

• They are capable of remedy.
• They are taking steps to remedy the breach.
• The borrower didn't approve the circumstances that gave rise to the breach.

A lender will typically agree to a cleanup period if financing for a particular bid for a publicly listed limited company. Other cases that may warrant a cleanup period include when borrowers haven't been able to fully carry out their due diligence on a group of target companies.

Purpose and Function of a Clean Up Clause

A clean up clause exists primarily to encourage responsible credit usage and to protect lenders from overexposure. By requiring borrowers to fully repay outstanding balances within a specified timeframe and maintain a zero balance for a certain period, lenders can assess a borrower’s true financial health and repayment ability.

This clause helps prevent “evergreen” borrowing, where a credit line is used continuously without substantial principal reduction. It can also serve as a safeguard for seasonal businesses, ensuring that sales revenues—not ongoing borrowing—cover regular operating expenses. When implemented effectively, clean up clauses create a natural checkpoint for both the borrower and the lender to review credit needs, repayment patterns, and potential risks.

Cleanup Clause Law and Legal Definition

Cleanup clauses are provisions included in contracts pertaining to loan agreements. They state that any loans are required to be repaid by a specified deadline, after which additional loans won't be given to the debtor for a set period of time. This is known as the "cleanup period." A cleanup clause can also apply to revolving lines of credit.

Common Provisions in a Clean Up Clause

Clean up clauses can vary depending on the lender, the type of financing, and the borrower’s risk profile. Common elements include:

• Repayment deadline: A specific date or period when all outstanding balances must be repaid.
• Zero balance requirement: A set number of days per year during which the account must maintain a zero balance (often 30–90 days).
• Overdraft restrictions: Prohibitions on incurring overdraft fees within the cleanup period.
• Utilization caps: Limits on the percentage of the credit line that can remain outstanding.
• Breach remediation in acquisitions: In acquisition financing, time allowed to correct breaches related to acquired companies before triggering default.

Including such provisions ensures borrowers cannot indefinitely roll over debts, aligning repayment behavior with the lender’s risk management strategies.

Best Practices for Negotiating a Clean Up Clause

When negotiating a clean up clause, both lenders and borrowers should:

1. Define the period precisely – Specify exact start and end dates for the clean-up requirement.
2. Tailor to the business cycle – Align repayment and zero balance periods with seasonal cash flows to avoid unnecessary strain.
3. Clarify exceptions – Identify circumstances under which the clause may be waived or modified, such as during an agreed business expansion.
4. Assess operational impact – Borrowers should evaluate whether the requirement will disrupt normal operations or cash flow.
5. Document breach consequences – Clearly outline remedies or penalties if the borrower fails to meet the requirement.

By addressing these points, parties can avoid ambiguity and disputes while ensuring the clause serves its intended financial and risk-control purposes.

Clean Up Clause in Commercial Leasing

Although most often associated with credit agreements, a clean up clause can also appear in commercial leases. In this context, it may require the tenant to return the leased property in a clean, undamaged condition at the end of the lease term. The clause can stipulate standards for cleaning, removal of fixtures, or restoration to original condition. Failure to comply can result in the landlord deducting cleaning or repair costs from the security deposit.

This broader application underscores the clause’s common purpose across contexts: ensuring obligations are fully met before the contractual relationship concludes.

Frequently Asked Questions

1. What is the main purpose of a clean up clause?
   To ensure borrowers repay credit balances in full and maintain a zero balance for a set period, preventing continuous debt rollover.
2. Are clean up clauses still common in loan agreements?
   They are less common today but still used in certain commercial lending and acquisition finance to manage risk.
3. Can a clean up clause be negotiated?
   Yes. Borrowers can negotiate the period length, exceptions, and repayment terms to match their business cycle.
4. Does a clean up clause apply to revolving credit only?
   No. While most common in revolving credit, it can also apply in term loans, acquisition financing, and even lease agreements.
5. What happens if a borrower breaches a clean up clause?
   The lender may treat it as a default, refuse further advances, impose penalties, or demand immediate repayment, depending on the contract terms.

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