Cross-Default Clause
A provision triggering default on one loan if default occurs on another.
Detailed Description
Cross-Default Clause
What is a cross-default clause?
A cross-default clause is a provision in a loan agreement that triggers a default on one loan when the borrower defaults on another loan or financial obligation.
What is the primary purpose of a cross-default clause?
The primary purpose is to protect lenders by alerting them to financial distress as soon as a borrower defaults on any obligation.
How does a cross-default clause impact borrowers?
It can significantly increase the stakes of their financial obligations, leading to a cascade of defaults and limiting negotiation abilities.
What are some implications for lenders regarding cross-default clauses?
Lenders can protect their investments across multiple loans and respond quickly to signs of distress, but they must also monitor borrowers' financial health closely.
What legal considerations are associated with cross-default clauses?
They must be explicitly defined in the loan agreement, outlining what constitutes a default and the rights of the lender, and their enforceability can vary by jurisdiction.