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September 13, 2017
One of the most exciting times you’ll have as an entrepreneur is when your business grows sufficiently to warrant office or retail space. When you first started, you were probably working out of your home to save money, and to protect yourself in case things didn’t work out the way you had planned. Now, your customer base has grown significantly and that home office just isn’t going to cut it anymore.
However, you need to be careful when looking at spaces for your business. Many business owners will get so hyped up on the idea of having office/retail space that they ignore contract language that could cost them everything. Aside of the usual pitfalls – such as long lease terms, common area maintenance fees, taxes, etc. – there is an incredibly devious clause in many commercial leases to which most business owners don’t pay attention – the Confession Judgment Clause.
When agreeing to a Confession Judgment clause in a commercial lease, you are essentially giving up your rights to a court hearing should your landlord decide you’ve somehow broken the lease. It works like this…
A renter enters into a lease with a Confession Judgment clause. A few months/years into the lease, something happens, causing the renter to be a few days late with the rent – medical issues, vacation, inattention, etc. The landlord then unilaterally determines that you’ve broken the lease, often without even telling you. Because there is a Confession Judgment clause in your lease, the landlord doesn’t have to take you to court. Instead, he files a judgment with the clerk, who grants it based on the lease, and you are now required – by court order – to pay the remaining balance on the lease immediately.
No court, no judge, no chance to defend your case. The landlord just files a piece of paper, and your life is forever changed.
From the landlord’s perspective, it’s understandable why they would want this clause… if you don’t pay the rent, they don’t have to shell out tons of money for attorneys to collect. On the other hand, if you have great credit, exceptional references, and an affinity to always pay your bills on time, then this type of clause shouldn’t be needed. While the clause is meant to protect landlords from unscrupulous tenants, many shady landlords have used it to make a quick buck.
If your credit history stands on its own, there’s no need for you to agree to a Confession Judgment clause. As an attorney, unless the credit circumstances are dire, I would never advise my clients to agree to one. In fact, it’s usually one of the first things I strike when reviewing a commercial lease.
If the landlord becomes adamant, there are a couple of options. First, you can offer to put up a larger deposit. Alternatively, you could agree to cover attorney’s fees in a rent-collection proceeding (if he wins). If the landlord still is not willing to budge, you need to ask yourself why this clause is so important to him… then you need to move on. If he wants it that badly, it’s probably because he intends to use it at some point; or at the very least, hold it over your head during the lease term.
There’s no reason you need to sign away your rights, regardless of “how perfect the space is”. There’s always another spot in a great location that will be just as incredible. Don’t allow eagerness to lock you into a bad deal.
Give us a call today and let’s review your commercial lease together.