If you have ever borrowed money to finance the purchase or operation of a business, or if you (or your company) have ever entered into a commercial real estate lease, there is a good chance that, amidst the scores of pages in your loan or lease documents, you have seen two or three long paragraphs, in capitalized bold type, with the heading "CONFESSION OF JUDGMENT." The paragraphs consist of a morass of long sentences containing a multitude of legalese. Your every instinct will tell you that you don't want to even try to read it, despite the typeset which is screaming to you that "this stuff is important."
What do these clauses mean? Why are they in a different typeset? Should you believe the landlord or lender when you are told that the clauses are simply "standard" and nothing about which to be overly concerned? In this two-part series, I will answer these questions.
A Confession of Judgment section in a lease, contract or loan document provides to the landlord, lender or person to be paid one of the strongest remedies available against a person who fails to make payment or abide by the contract. Basically, a Confession of Judgment works in the following manner:
If a tenant fails to pay rent or a debtor fails to make payment to a creditor, the landlord or creditor can file a complaint against the tenant or debtor. At the same time the complaint is filed, the landlord's/creditor's attorney will file a second document, called a "warrant of attorney" or "confession of judgement." The warrant of attorney will say that the attorney for the landlord/creditor is
also the attorney for the tenant/debtor, and that, on behalf of the tenant/debtor, the attorney is "confessing" that everything in the complaint is true, and that a judgment should be entered against the tenant/debtor. That's right: A Confession of Judgment allows a landlord or creditor to not only file a complaint, but to contemporaneously have a judgment entered against the tenant/debtor, without any chance for the tenant or debtor to respond.
In commercial leases, landlords will usually have two Confession of Judgment clauses, i.e., one providing to the landlord a judgment for possession of the leased premises, and one providing for an entry of a monetary judgment against the tenant for the money owed to the landlord. In commercial contracts and obligations to pay (such as a promissory note), the Confession of Judgment is almost always accompanied by an "acceleration clause." The acceleration clause states that the creditor is entitled to not only the amount currently due, but also for the full amount which would become due under the contract or note--even if only one or two payments are overdue at the time the complaint and Confession of Judgment are entered.
Because of the draconian effect of the Confession of Judgment remedy, many states have abolished it entirely. Pennsylvania still allows for Confessions of Judgment in commercial matters, but not in matters relating to residential real estate leases, residential mortgage loans or consumer goods purchases.
For obvious reasons, Confessions of Judgment--even in commercial settings--are under constant scrutiny by the courts and constant attack from small business borrowers. In Part 2 of this blog, we will examine whether Confessions of Judgment are still strongly enforced, and some ways in which their effect can be minimized.