If you have ever obtained a business loan or signed a commercial lease, you may have heard of the phrase, “confession of judgment.” Even if you have heard that phrase, chances are you have no idea what it means. And chances are you signed those loan or lease documents anyway. This is a fact of life for seasoned business professionals down to new start-up owners. Consider this a quick and dirty explanation of one of the most archaic legal mechanisms faced by business owners.
A confession of judgment is a legal process by which one party to a contract (most times a borrower or tenant) agrees to allow the other party (the lender or landlord) to enter a judgment against them if they default under the contract. The contractual provision will state that the lender/landlord can go to the court and enter a judgment without any notice and without doing any of the hard work typically required to obtain a judgment (e.g. filing and serving a complaint, taking discovery, going to trial, etc.). Confession of judgment provisions allow the lender/landlord to enter a judgment for money or to regain possession of the property, or both. Some States have abolished the use of confessions of judgment because they are so oppressive and eliminate the due process protections required in a typical lawsuit. Pennsylvania has abolished confessions of judgment in consumer transactions, but still allows them in commercial transactions, subject to certain protective requirements found enacted by the legislature or imposed by the courts. For example the contractual provision allowing the confession of judgment must be clear and conspicuous (perhaps separated from the other text or in bold or CAPS), not hidden in the contract or difficult to notice. The courts strictly scrutinize confession of judgment provisions and the court filings relating thereto for any defects under the law.
Many times commercial borrowers and tenants are not aware of these requirements, or the effect of such provisions, until after a confession of judgment has been entered, leaving them fighting an uphill battle to vacate the judgment and avoid collection or loss of their property. Therefore, it is extremely important for business professionals to have an attorney review any loan documents or leases for these provisions before completing the transaction and explain the potential consequences. If you find yourself served with a confession of judgment, it is imperative to act swiftly and contact an attorney to determine whether there are legal grounds to challenge the judgment.
For commercial lenders and landlords confession of judgment provisions can be very beneficial, saving significant legal fees and time to recover possession of a rented property or obtain judgment on a large commercial loan. However, it important to have legal counsel draft these provisions so that they comply with the strict requirements imposed by the courts and do not fall victim to any technical challenges raised by a saavy borrower/tenant seeking to avoid the judgment.
Our attorneys in Bucks County and Montgomery County are here to assist you.
The information above is general: we recommend that you consult an attorney regarding your specific circumstances. The content of this information is not meant to be considered as legal advice or a substitute for legal representation.