Dangers in Your Commercial Lease- The Confession of Judgment Clause

A recent court decision from the Philadelphia Courts should cause anyone with a commercial lease to review their contracts. The issue in this case required the court to determine if a confession of judgment clause in a commercial lease was enforceable. The Court ruled the confession of judgment clause was not enforceable against the tenant because the landlord did not strictly follow the statute. As a result, the Court struck down the confessed judgment. While not ground breaking in and of itself, the opinion serves as a reminder that a court will closely scrutinize all confessions of judgment. You can read the court’s decision by clicking here. Before we look closer at the court’s decision, a basic understanding of what a confession of judgement is and why it is so powerful is required.

What is a confession of judgment?

A confession of judgment clause is usually found in most commercial lending transactions and commercial leases. In a nutshell, a confession of judgment clause flips our notion of due process on it head. A confession of judgment clause authorizes the attorney for the bank or landlord to appear for the borrower or tenant without any notice and enter a judgment for a specific amount of money (or for possession of the premises in a lease situation). Think about this for a second. The first pleading your lender serves is the paper that informs you a judgment was entered against you. Game over. Or is it?

Courts Disfavor Confessions of Judgment – Deprivation of Due Process

Courts generally disfavor confessions of judgment because they deprive defendants from their constitutional due process rights. More to the point, it takes away the right to have your day in court. There is no due process with a confessed judgment. As a result, a court strictly scrutinizes a confession of judgment clause to make sure sure all of the required steps are followed by the parties to the contract. However, if all of the rules are followed, two parties can contract away the right to notice and a hearing before the entry of a judgment.

Confession of Judgment Basic Requirements

Conspicuous Location Required

The confession of judgment is one of the most powerful clauses that exist in a commercial contract. As a result, courts routinely examine not only the words of the confession of judgment, but also location and font style of the confession text. To pass judicial scrutiny, a properly drafted confession of judgment must be in a conspicuous location. In other words, a confession of judgement cannot be buried among the terms of the contract. The clause must be set apart and stand out. Courts look for confession clauses that are in bold case, all caps, and have a prominently titled heading. Practice Point: Look carefully at your contract, whether you are just signing or it has been in effect for awhile. If the confession clause is “hidden” in any way, it may not be enforceable. Contact our firm or other legal counsel to take a look.

Information and Procedural Requirements

A complaint must contain the information set forth by Rule 2952 of the PA Rules of Civil Procedure. If your complaint does not contain this information, the court will not enforce your confessed judgment. At a minimum, the complaint must include the following information and follow the below procedural requirements :

• The name and last known address of all parties
• A copy of the document that authorizes the confession – also known as the warrant of attorney
• A statement that judgment has not been entered in another jurisdiction
• A statement that the judgment is not being entered against a person in a consumer credit transaction
• A statement that an event of default has occurred and demand has been made as required by warrant
• Itemization of amount due
• Required signatures and verification
• Comply with New Power of Attorney Act (discussed below)

While there are other requirement and procedural hurdles, this list gives you a flavor of what is involved.

Why the Court Struck Confessed Judgment

In this case, the Philadelphia judge struck the confessed judgment because it was not conspicuous. The Court found the confession to be buried, hidden and was written in small font. The amendment also failed to specifically set forth the confession clause itself. Rather, the amendment just referred to the terms set forth in the original lease. While this will successfully incorporate most terms, it will not incorporate a confession of judgment clause. This Court held that the lessee’s signature on the amendment did not bear a direct relation to the warrant of attorney. The warrant of attorney was in the original lease and not in the amendment. As a result, the confessed judgment was struck open. The Court’s logic makes sense. If the confession clause is not on the lease amendment itself, can it be a knowing waiver? If it was not a knowing waiver, it was hidden and not conspicuous.

New PA Power of Attorney Act

Earlier this year we pointed out that PA’s power of attorney law underwent significant changes. Click here to read the earlier post on this blog. It is important that the warrant of attorney contains the necessary agent disclaimer language so it does not violate Section 5601.3(b) of the new act. This section requires that an agent must take action only for the benefit of his/her principal. In the context of a warrant of attorney, we all can agree that entering a judgment against your principal is clearly not in the best interest of your principal.

Confession of Judgment

The practical take away is that a confession of judgment and your commercial lease in general may not be all that it seems. If your lease contains a confession of judgment, the landlord is required to follow rules regarding not only the specific wording of the clause, but also to the exact placement as well. Failure to take both aspects of the confession into account could make their confession clause vulnerable in litigation. Doug Leavitt and the attorneys at Danziger Shapiro, P.C. are available to assist you in connection with preparing or reviewing your transactions documents. Please call us for a consultation to discuss your concerns. We look forward to hearing from you.

This entry is presented for informational purposes only and is not intended to constitute legal advice.