Legal Definitions - cross-default clause

A cross-default clause is a provision in a contract that states if a borrower defaults on one debt obligation, it will trigger a default on another obligation. This means that if a borrower fails to make payments on one loan, it could cause them to default on other loans they have.

Let's say a company has taken out two loans, one from Bank A and another from Bank B. Both loans have a cross-default clause. If the company defaults on the loan from Bank A, the cross-default clause will be triggered, and the company will also be in default on the loan from Bank B. This means that Bank B can demand immediate repayment of the loan, even if the company has been making payments on time.

Another example could be a landlord who has a cross-default clause in their lease agreement with a tenant. If the tenant fails to pay rent, it could trigger a default on other leases the landlord has with other tenants in the same building.

These examples illustrate how a cross-default clause can have serious consequences for borrowers and tenants. It is important to read and understand the terms of any contract before signing it, especially if it includes a cross-default clause.