Definition
Default occurs when a borrower or tenant fails to meet the legal obligations of a loan or lease agreement. This typically involves missed payments but can also include violations of contractual covenants or other required conditions.
Types of Default
- Monetary Default: Failure to make required payments (rent or debt service).
- Technical Default: Violation of non-payment terms such as financial covenants or reporting requirements.
- Lease Default: Tenant breaches that may trigger legal remedies or eviction.
Why It Matters
Default directly impacts cash flow stability, asset value, and risk exposure. For lenders, default may trigger foreclosure rights. For landlords, it may initiate eviction or termination proceedings.
Investor Implications
- Impacts debt service coverage ratios (DSCR).
- Can trigger loan acceleration clauses.
- May affect refinancing or exit timing.
- Increases legal and administrative costs.
Cure Periods
Most contracts provide a cure period — a specified time frame in which the defaulting party can remedy the breach before enforcement action begins.
Risk Management Strategies
- Thorough tenant screening and underwriting.
- Conservative leverage and debt structuring.
- Maintaining liquidity reserves.
- Clear lease and loan documentation.