Imagine losing a case even before the other party files a complaint. At first blush, the possibility seems stunning, even unconstitutional. But, this is precisely the point of a confession of judgment. These types of clauses are commonly found in commercial leasing and commercial lending agreements in Pennsylvania. In fact, Pennsylvania is among the few states that still allow the enforcement of such a provision.
What is a Confession of Judgement and Who Uses It?
It is important to note that confession of judgment clauses are permitted only in commercial leases and loans, with the law prohibiting their use in residential leases and consumer lending.
In the commercial lease context, a confession of judgment permits a landlord to obtain an immediate judgment against a tenant for nonpayment of rent or another material breach of the lease agreement. Essentially, the landlord obtains a judgment against the tenant without the tenant getting the opportunity to defend themselves in court. A commercial lease can have two distinct confession of judgment clauses: one for rent (money) and another for possession. One provision permits judgment for unpaid rent while the other allows the landlord to retake possession of the real property.
Besides commercial leases, confession of judgment clauses are commonly found in commercial loan documents, including mortgages and promissory notes. Personal guarantees, in which an individual promises personal funds if a borrower defaults on a commercial loan or lease, may also have a confession of judgment provision. Accordingly, it is critical for guarantors to understand the extent of their guarantees and the rights they are waiving.
Components of a Confession of Judgement Clause
There are various legal requirements for a valid confession of judgment clause. Most importantly, it must be in writing. The provision must also be conspicuously worded so that it is clear to the tenant, borrower, or personal guarantor that they are waiving their right to due process.
The requirement to be conspicuous should be both in substance and text. Consequently, the confession of judgment clause should be in large, capitalized, and bold text. It is good practice to have the borrower, tenant, or guarantor initial or sign the confession of judgment clause. The clause should also have clear instructions for the signatory to personally review the provisions with their attorney.
Why You Should Be Careful
Normally, a plaintiff needs to file a complaint, thereby initiating litigation. Assuming the defendant files a response to the complaint, it could take months or even years before a judgment is rendered. A confession of judgment clause, however, allows the plaintiff to skip all these steps and obtain an immediate judgment.
Even though many legal practitioners view confession of judgment clauses as unfair, commercial landlords and lenders include them in nearly all Pennsylvania leases, loans, personal guarantees, and other contracts. However, many commercial tenants and small businesses, including individual guarantors, do not understand the significance of confession of judgment clauses allowing the landlord/lender to skip the often lengthy litigation process. A confession of judgment confers immense power to commercial landlords and lenders while severely limiting the other party’s options.
Accordingly, as a commercial tenant, borrower, or personal guarantor, you should be aware that you are practically giving up your right to due process when you enter into a contract that has a confession of judgment clause. At the same time, landlords and lenders almost never agree to remove them from the contract.
Possible Defenses to a Confession of Judgment
While confession of judgment clauses usually leave commercial tenants or borrowers with limited options, some possible defenses include errors or defects in the judgment. For instance, if a lease agreement requires a seven-day default notice but the landlord does not comply with the requirement, the tenant has grounds to have the court nullify the judgment.
Other possible defenses include the landlord’s failure to adequately explain the provision and failure to properly serve the defendant.
Bottom Line
Confession of judgment clauses are often complicated, and so is their enforcement and defense. You should understand what you are getting yourself into when agreeing to a commercial lease or other commercial contract with a confession of judgment clause. A skilled attorney can help you navigate the complex legal issues while protecting your rights.
To begin a discussion about your corporate structure feel free to contact Moretsky Law for a confidential consultation at 215-344-8343.
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