The failure of a contractual party to perform in accordance with the terms and conditions of an agreement is a breach of contract. A breach of contract that would be an event of default if a grace period elapses, a notice of default is given or a determination of default is made is a default. Not every default is an event of default. An event of default (EoD) is an event specified in a financing agreement provision which, if it occurs, entitles the lender or lessor to take recourse and exercise its default rights and remedies, lease termination, repossession and foreclosure.
A breach of contract does not immediately become an event of default if the event of default specifies a grace period, which is a given period of time that an obligor is allowed to remedy a breach of contract before an event of default is triggered. A breach of contract that becomes an event of default if not remedied by expiration of the grace period is a potential event of default, it existing from the time when the agreement is breached until the grace period expires or the default is remedied. Larger lease transactions generally include grace periods and require lessees to notify the lessors of the occurrence of events that could give rise to default.
| Default | Potential Event of Default | Event of Default |
|---|---|---|
| Breach of Contract → | ← Grace Period → | ← End of Grace Period |
Moreover, creditors have different rights and remedies depending on whether the default is financial or nonfinancial. A financial default is the failure of an obligor to financially perform in accordance with the terms and conditions of an agreement, such as nonpayment of interest or principal when due or violation of a financial ratio covenant. The failure of an obligor to perform in accordance with the terms and conditions of an agreement in ways that are not financial in nature, such failure to properly insure the leased asset or provide information as required is nonfinancial default. The ratings of credit agencies consider only financial default – not nonfinancial default.
Leave A Comment
You must be logged in to post a comment.