Does a reservation of rights letter mean the bank will call my loan?

Not by itself. It says the bank knows of a default and is keeping its options, and many borrowers who receive one are not asked to repay early. It does mean the file has become more serious. The bank may be preparing to ask for information, charge default interest, reduce a limit or pass the file to a specialist team. Read the whole letter, since those steps are often included in it, and take it to an adviser promptly.

How should a business respond to a reservation of rights letter?

Read it with your adviser, check whether the default it describes has actually occurred, and answer any request by the date given. If the bank has made a factual mistake, correct it in writing. Send the current numbers and an honest account of the cause and plan. Do not treat friendly conversations with your banker as settling the matter. If you are told the breach will be overlooked, ask for that in writing, in the form of a waiver.

Why send a reservation of rights if the agreement has a no-waiver clause?

Because the clause may not be enough on its own. A no-waiver clause says in general terms that delay or partial action does not give up a right, but courts in England and Australia have accepted that such clauses do not prevent every waiver by conduct. A letter specific to a known default provides clearer evidence of the lender's position at the time. Neither is conclusive if the lender then behaves as though the default no longer matters.

Does a reservation of rights letter stop a loan being classified as current?

No. Under the IFRS-based standard used in New Zealand and Australia, a loan stays long-term after a covenant breach only if the borrower has the right at balance date to defer payment for at least twelve months, which generally needs a waiver or a qualifying period of grace agreed by that date. A reservation of rights gives no such right; it confirms that the lender is keeping its own. Reporters on other frameworks should check with their accountant.

// WORKED EXAMPLEWHAT THE DOCUMENT DOES

Reservation of Rights: What the Bank's Letter Means

The bank has noticed. It has not decided.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-09 · 6 MIN READ

// THE SHORT ANSWER

A reservation of rights letter, on its own, asks a business to pay nothing today. It is the bank's way of keeping a decision open. Once a lender knows of a default, what it does next can later be read as a choice to carry on regardless, so it writes to say that nothing it does for now should be read that way. The letter changes no term and forgives nothing. It matters to the recipient as a signal that the breach is on the record, and to the bank only so far as its behaviour stays consistent with what it wrote.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// MAKE THE CALL

Issue 04 — Highview Industries. Same request as Issue 01 on the surface. A completely different file underneath. Your call first, then the senior banker's.

Read the file →

PART OF Loan Covenants, Explained

// 01 — THE PROBLEM THE LETTER SOLVES

When an event of default occurs, the lender has a choice between standing on its rights and carrying on with the contract, and the law does not let it have both indefinitely. Courts in common-law systems describe the risk in terms of waiver by election and estoppel: a lender that knows of a breach and acts in a way consistent only with continuing the contract, or leads the borrower to believe it will not act, may lose the right to rely on that breach.

Yet the sensible course after a default is often to do nothing dramatic. A bank wants time to get figures, understand the cause and decide. It may also want to keep honouring the overdraft, because stopping it could finish the business. The letter exists so that the bank can take that time without its patience being taken for agreement. Most facility agreements also carry a no-waiver clause saying that delay is not waiver. The letter reinforces that clause with something specific to this breach.

// 02 — WHAT THE LETTER SAYS, AND DOES NOT

A typical letter identifies the default, often adding that there may be others. It states that the lender has not waived the default and that continuing to accept payments, allow drawings or hold discussions is not a waiver. It keeps every right under the documents. It may also do other work in the same envelope: ask for current figures, say that default interest will apply, withdraw the undrawn part of a line or notify a move to a specialist team.

It is important to read it for those additions. The reservation itself does not demand repayment, cancel a facility or change any term. Any of those would need its own words and a right in the agreement to support it. Nor does the letter cure the breach, so the default remains open and the bank can act on it later. A borrower that files the letter and hears nothing for three months has not been forgiven.

// 03 — THE EXAMPLE

A mushroom grower, constructed for this page like every figure in it, owes its bank US$3.8m on a term loan and US$400,000 on a US$600,000 overdraft. Its agreement requires debt service cover of 1.25 times, tested at 31 March. That level and the default rate below belong to the example and are not offered as market norms. A compost supplier's price rise has squeezed the year.

Cash available for debt service 540,000

Scheduled principal and interest 500,000

Cover 540 ÷ 500 = 1.08× covenant 1.25×

Needed 500,000 × 1.25 = 625,000

Short by 85,000

Default interest at 2% 4,200,000 × 2% ÷ 12 = 7,000 a month

The certificate arrives on 30 April. On 12 May the bank writes: the covenant has failed, an event of default has occurred and is continuing, nothing is waived, default interest applies from 1 June, and allowing the overdraft to operate for the time being is not a waiver. It asks for a thirteen-week cash forecast. The grower still has its overdraft and owes nothing extra today, and it has a default on the record.

Now change one thing. In June the relationship manager emails: "Don't worry about March, we'll deal with it at the September review," and the bank later raises the overdraft limit to help with a seasonal purchase. If the bank tries in August to demand repayment on the March breach, the grower has an argument the first version did not give it: that the bank chose to carry on, or led it to rely on that. The letter would help the bank, but the email and the larger limit would be the facts in dispute.

// 04 — HOW IT DIFFERS FROM A WAIVER OR A DEMAND

Three letters can follow a default, and they sit in different places. A covenant waiver gives up the right for a stated breach. A demand exercises the right. A reservation of rights does neither, and keeps the right alive while the lender decides. A standstill goes a step further than the reservation: the lender agrees for a period not to enforce, usually on milestones, and the default still stands.

The difference reaches the accounts. A reservation of rights does not give the borrower any new right to defer payment, so it does nothing to keep a loan long-term at balance date. An auditor who is shown one should read it as confirmation of the breach.

DEFINED IN ONE PARAGRAPH → · COVENANT WAIVER → · THE BANK IN YOUR AUDIT FILE →

// 05 — WHERE THE LETTER STOPS WORKING

A reservation is not a complete shield. In 2022 the English High Court, in [2022] EWHC 728 (QB), held that a finance company had lost the right to rely on earlier late payments despite a no-waiver clause and a reservation of rights. It had offered more time to clear the arrears and charged late fees and interest on them, which the judge found consistent only with keeping the contract alive. The reservation still did some work: the judge thought it likely stopped the offer having any wider effect. Silence and delay are treated differently from positive conduct of that kind, and even charging default interest can raise the question, which is why letters commonly deal with it expressly.

Australian appellate courts have decided these cases on their facts: accepting late interest has been held not to waive a breach, a non-waiver clause has been accepted as capable of being waived by conduct, and exercising one of two inconsistent rights may defeat a reservation. New Zealand has put the affirmation rule for cancelling a contract into statute: under section 38 of the Contract and Commercial Law Act 2017, a party that affirms with full knowledge of the breach cannot cancel. The section speaks of cancellation, not of calling a loan. For a lender the lesson is consistency: one voice to the borrower, and no new facility or relief while a reservation stands unless it is deliberate and documented. For a borrower it is to treat the letter as real, give it to an adviser, answer what it asks, and get any comfort from the bank in writing.

PROBLEM LOANS AND WORKOUT → · WHEN YOUR LOAN GOES TO WORKOUT →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

High Court of England and Wales (Queen's Bench Division), [2022] EWHC 728 (QB) — paragraphs 83 to 90 — Holds that positive conduct, in an offer of time and charges on late payments, waived reliance on earlier defaults despite a no-waiver clause and a reservation of rights, while the reservation likely confined the waiver's effect — section 05.
Australian Accounting Standards Board, AASB 2022-6 Amendments to Australian Accounting Standards – Non-current Liabilities with Covenants — paragraphs 72B, 74 and 75 — Sets out when a loan with a breached covenant must be classified as current, the accounting point in section 04 and the fourth question.

// QUESTIONS PEOPLE ASK

Does a reservation of rights letter mean the bank will call my loan?: Not by itself. It says the bank knows of a default and is keeping its options, and many borrowers who receive one are not asked to repay early. It does mean the file has become more serious. The bank may be preparing to ask for information, charge default interest, reduce a limit or pass the file to a specialist team. Read the whole letter, since those steps are often included in it, and take it to an adviser promptly.
How should a business respond to a reservation of rights letter?: Read it with your adviser, check whether the default it describes has actually occurred, and answer any request by the date given. If the bank has made a factual mistake, correct it in writing. Send the current numbers and an honest account of the cause and plan. Do not treat friendly conversations with your banker as settling the matter. If you are told the breach will be overlooked, ask for that in writing, in the form of a waiver.
Why send a reservation of rights if the agreement has a no-waiver clause?: Because the clause may not be enough on its own. A no-waiver clause says in general terms that delay or partial action does not give up a right, but courts in England and Australia have accepted that such clauses do not prevent every waiver by conduct. A letter specific to a known default provides clearer evidence of the lender's position at the time. Neither is conclusive if the lender then behaves as though the default no longer matters.
Does a reservation of rights letter stop a loan being classified as current?: No. Under the IFRS-based standard used in New Zealand and Australia, a loan stays long-term after a covenant breach only if the borrower has the right at balance date to defer payment for at least twelve months, which generally needs a waiver or a qualifying period of grace agreed by that date. A reservation of rights gives no such right; it confirms that the lender is keeping its own. Reporters on other frameworks should check with their accountant.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Credit sanctionerHolds delegated authority and signs — or declines — the lending the front line brings.
Legal counselAdvises the bank on what it can do, drafts and negotiates what it signs, and manages what goes wrong.
Portfolio managerOwns the credit on a book after the money is out — reviews, covenants, ratings and early warning.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

THE FIRST QUESTION · THE LOAN · PROTECTION

A food manufacturer's loan is secured by a floating charge over its stock and debtors and a fixed charge over its factory.

Which security can shrink without anyone breaching anything?

7 MORE ON THE LOAN · PROTECTION →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHReservation of rights What is a reservation of rights letter from a bank?