What Is a Cross-Default Clause?
In high-level commercial real estate finance, lenders and landlords want absolute security. If a major developer is starting to run out of money, a lender does not want to wait until the developer specifically stops paying their loan. They use a cross-default clause to protect themselves.
A cross-default clause legally links multiple, entirely separate contracts together. It states that an act of default on Contract A immediately triggers an automatic, legally binding default on Contract B.
How It Creates a Domino Effect
A cross-default clause is incredibly dangerous for real estate investors because it creates a financial domino effect. Consider this scenario:
A developer has two separate loans with the same bank: a $5 million mortgage for an apartment building, and a $2 million loan for a shopping plaza. The developer runs into trouble and misses a payment on the shopping plaza loan. They are perfectly up to date on the apartment building loan.
However, because both loans contain cross-default clauses, the missed payment on the shopping plaza instantly throws the apartment building loan into default. The bank can immediately demand the entire $7 million be paid back at once and can file foreclosure lawsuits against both properties simultaneously.
Cross-Default in Commercial Leases
These clauses are also heavily used in retail commercial leases. If a restaurant chain rents three different spaces in three different malls owned by the same massive landlord, the leases will contain cross-default clauses. If the restaurant fails and stops paying rent at Mall A, the landlord can legally evict the restaurant from the highly profitable locations at Mall B and Mall C.
Related Terms
- Cross-Collateralization — A related concept where multiple properties secure one loan
- Foreclosure — The lawsuit triggered by the default
- Breach of Contract — What the cross-default clause automatically triggers
Barnes Walker Commercial Negotiations
Barnes Walker's commercial real estate attorneys fiercely review loan documents and master leases to identify and neutralize predatory cross-default clauses, inserting strict 'notice and cure' periods to prevent a single missed payment from collapsing our clients' entire property portfolios. Request a legal inquiry for assistance.
Reviewed by the attorneys at Barnes Walker, Goethe, Shea & Robinson, PLLC