Cross-default is actually a provision of a credit agreement that defaults the borrower when the borrower defaults with another credit. In other words, if the borrower is late with a loan, he is considered to be in arrears with his other loans and the debt of other loans is immediately due and payable, even if there is no violation of other loans. For example, if a borrower is late in their bank loan, the cross-default clause would also cause them to fall behind on their mortgage. Thus, cross-default clauses in credit agreements can easily create a domino effect for borrowers. On January 10, 2018, Sears Holdings Corp. entered into a $100 million loan agreement with various lenders. Section 7.01 includes 11 separate failures, including those mentioned above, with the exception of the MAC, for the retailer in difficulty. Clear terms are common in a properly crafted credit agreement, but the agreement for Sears is particularly detailed and restrictive, as the credit consortium takes extra precautions to protect its interests. As mentioned briefly, cross-default clauses are very favorable to the debtors of the agreements, as they are sufficient to minimize the risk of default in the agreement, but these clauses can have a negative impact on borrowers. For example, due to the domino effect generated by cross-default clauses, a borrower who has obtained multiple credits may be caught in default with all of his loans due to the default of a single loan and lose all of his financial advantage and power. In order to protect borrowers from such negative situations, the parties should negotiate and take certain measures.
When a standard occurs, the contract itself is the first place to look. In most cases, contracts exceed local laws, so your contract is the best guide to knowing what constitutes a default and what the options are for both parties. Most contracts have a standard language that allows a party to terminate a contract if a party violates the treaty. However, the contract may give the other party time to heal the failure. For example, a contractor who is not paid on time may have to give a customer three days before terminating the contract. In summary, cross-default clauses are essential for the parties to credit agreements, in order to avoid borrowers often being caught in default of contractual obligations. However, as noted above, these clauses can lead to very disadvantaged situations for borrowers. At this point, the clearest way for both parties would be to negotiate such clauses and mitigate them for the benefit of both parties, given that cross-default clauses are likely preferred and insisted upon by debtors. A “default event” is a term defined in credit and leasing agreements. In a typical credit agreement, the following would constitute a default event: a default can occur in different ways in a credit agreement.
It may happen that the borrower does not pay the agreed value, as well as when the borrower violates the positive or negative covenants of the agreement. A positive agreement requires the borrower to carry out certain transactions, while a negative agreement obliges the borrower to avoid certain transactions. A cross-default clause related to the payment of the contract value is called a “cross-payment default” and a cross-default related to the performance of other contractual obligations is called a covenant cross default. The main purpose of a default clause is to induce a tenant to stop the end of their contract and comply with all the requirements set out in the rental agreement. . . .