Default Clause: Everything You Need to Know
Its a provision in a legal contract that states what will happen if either party in a contract defaults or fails to hold up their end of the agreement.3 min read
2. Default Clause Objective
3. Consequences of a Poorly Written Default Clause
4. Important Lease Terms
5. What Is a Termination for Default Clause?
A default clause is a provision in a legal contract that states what will happen if either party in a contract defaults or fails to hold up their end of the agreement. These clauses can be found in any type of contract including loan agreements, lease agreements, and property agreements.
What Is a Default Clause in Lease Agreements?
In a commercial lease agreement, you'll need to include a default clause that will effectively allow the landlord to require their tenants to comply with all of the requirements of the agreement. Usually, a default clause in a lease agreement provides an explanation for how to carry out an eviction in the event that the tenant defaults on their obligations or violates a rule of the agreement.
Default clauses can also provide requirements for a tenant to make payments to cover any unpaid rent or damages to the property. These can require the defaulting party to cover any costs of alterations or subleasing. Fines for violations of legal regulations should also be covered in the default clause of a lease agreement.
Default Clause Objective
The main purpose of a default clause is to give a tenant incentive to hold up their end of the agreement and follow any requirements laid out in the lease. If a tenant understands that they could be evicted or required to pay for damages, they will likely be more careful to uphold the lease agreement.
In most states, commercial tenants have a lot of power through the court system and can use it to manipulate or delay a landlord or their property. Landlords will benefit from finding a lawyer to help them draft an effective default clause to avoid such delays and manipulations. This can help avoid any issues with the expiration of the lease. Sometimes, tenants will refuse to leave by the date agreed upon in the contract. A default clause can prevent this.
The primary objective of a lease agreement default clause is to provide the landlord with the legal means to:
- Hold tenants responsible for any breaches of agreement.
- Get an eviction judgment when needed.
- Minimize their losses in the case of a breach.
Consequences of a Poorly Written Default Clause
If a default clause is poorly drafted, a landlord and tenant could end up stuck in court for years debating over or litigating a case. Ineffective default clauses prevent a landlord from being able to get a defaulting tenant out of their property and finding a tenant who will uphold their agreement. Weak default clauses can allow a tenant to take advantage of their landlords by living in a property without staying up to date on rent or taking proper care of the property.
Important Lease Terms
When an attorney negotiates the terms of a lease contract, they should be sure to include the following types of provisions:
- Termination of the lease due to lack of rent payments
- Acceleration of rent payments in the event of default payments
- Deeming any money due other than rent as additional rent that can, therefore, be subject to a nonpayment summary proceeding in court
What Is a Termination for Default Clause?
In the case of a material breach of the obligations of a contract, the non-breaching party has the option to terminate the agreement. This is done by drafting a written notice of the contract termination that specifies the breaching actions of the other party. A default clause may be subject to what's called a right to cure. This means that the breaching party has a right to defend their actions.
The right to cure in contract law provides a 20 day period from the date that the termination notice was drafted. If the breaching party can basically make right on their actions that went against the terms of the original contract, then the contract will not be terminated.
The breaching party will also be given a notice of their breach of contract. They have 60 days after this notice to cure their breach. If the breaching party doesn't cure their breach within the time allowed, the injured party has the right to terminate the contract immediately with a notice to the breaching party.
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