Event of default
Default is the occurrence of an event or circumstance against which a party to a contract seeks protection.
For example, a contract may state that the recording of a lien against certain property is a default. If the default is left uncured after notice and the passage of time, it may ripen into an event of default, which creates in the non-defaulting party certain rights, such as acceleration of a debt or the right to exit a contract.
There are three types of event of default:
- payment default, i.e. the failure to pay principal or interest when it falls due for payment;
- prospective default, when payment is not yet due, but it is clear that it will not be capable of being paid when it does fall due. For example, a payment is due in three months' time but the borrower has been put into liquidation: and
- covenant default, when the borrower fails to keep a promise (a covenant) that it has made in the contract.
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