Cross-Collateralization and Cross-Default Clauses in Commercial Loan Documents - Know the Difference
Both cross-collateralization (aka “dragnet”) and cross-default clauses are common provisions in commercial loan documents. A cross-collateralization clause generally provides that the same collateral, often real property, secures multiple loans from the same lender. In the construction loan context, a developer will often take out sequential loans from the same lender to finance particular phases of a project. As a condition to borrow, the lender will usually require that all of the loans be secured by all of the phases of the project. In contrast, a cross-default clause provides that an event of default under one loan constitutes as an event of default under a separate loan. In most cases, both clauses will appear together. But, when they appear independently, the cross-default clause is most common, particularly if there is other security in the collateral.