In the wake of the new law, leases containing a confession of judgment provision will need to be reviewed, and standard clauses for new leases and amendments will need to be revised to comply with the new requirements.
New Pennsylvania legislation that went into effect as of January 1, 2015 brought changes to the landscape of Pennsylvania’s already unique confession of judgment laws. House Bill 1429 (HB 1429) was unanimously passed by the Pennsylvania House and Senate and was signed into law by former Governor Tom Corbett on July 2, 2014 (as Act 95). HB 1429 revises Title 20, Chapter 56 of the Pennsylvania Consolidated Statutes (20 Pa. Cons. Stat. §§5601–5612). This chapter deals with the use of powers of attorney for, in relevant part, property transactions. In the wake of the new law, leases containing a confession of judgment provision will need to be reviewed and standard clauses for new leases and amendments will need to be revised to comply with the new requirements.
Confession of Judgment Provisions
Confession of judgment provisions are common in Pennsylvania commercial leasing. The provision is an agreement (normally a clause in the lease itself) under which a party to a lease agrees that, upon an event of default, the landlord may unilaterally confess judgment against the non-residential tenant without previous notice or a hearing. A lease may have confession of judgment clauses for money damages, ejectment to obtain possession of the leased premises or both. Landlords enjoy these provisions because they reduce the cost of obtaining judgment and streamline the remedy process.
Because tenant notice is not required under a confession of judgment provision, the tenant does not have a right to dispute the entry of the judgment, except in limited circumstances.1 However, because there is neither notice nor opportunity for the tenant to be heard, courts in Pennsylvania normally hold such clauses in disfavor and have implemented various requirements before enforcing same. Specifically, Pennsylvania courts have required that a confession of judgment clause must be in writing, signed by the person to be bound, and that the signature must bear a direct relationship to the warrant and not be implied.2
Changes Implemented by HB 1429
HB 1429 was not specifically targeted to confession of judgment provisions, but rather was passed by the legislature to enhance protections to all signatories of power of attorney contracts. The revised statute imposes new regulations, sets new requirements on form and content, and amends the rights and duties of the grantee and grantor.
Procedurally, under new statute Section 5601, all powers of attorney executed on or after January 1, 2015 must have the signature or mark of the principal and must be acknowledged before a notary public or other individual authorized by law to take acknowledgements (not the agent).3
For landlords, the result of this procedural change means that when including a confession of judgment provision in a standard commercial lease, the statutory revisions impose a requirement that the tenant’s signature to the lease now be notarized.
The changes to the statute also impose new duties on the agent in the form of new Section 5601.3(a) and Section 5061.3(b). Under 5601.3(a), these obligations, which may not be waived by the principal, require that the agent:
act in accordance with the principal’s reasonable expectations, to the extent actually known by the agent, and, otherwise, in the principal’s best interest
act in good faith
act only within the scope of authority granted in the power of attorney.
Section 5601.3(b) imposes additional duties on the agent, not all of which are relevant in the leasing context and which may be waived by the signatory as provided in the power of attorney. In relevant part, these duties include the following:
act loyally for the principal’s benefit
act so as not to create a conflict of interest that impairs the agent’s ability to act impartially in the principal’s best interest
act with the care, competence and diligence ordinarily exercised by agents in similar circumstances
keep a record of all receipts, disbursements and transactions made on behalf of the principal.
Implications for Commercial Landlords and Tenants
For Pennsylvania commercial landlords and tenants, these agency duties under both Sections 5601.3 (a) and (b) require new language to be included in confession of judgment provisions. Landlords have to be especially wary of Section 5601.3(a), which, unlike Section 5601.3(b), does not include a provision to allow tenant waiver.
Section 5601.3 (a)’s second and third mandates listed above are reconcilable with the standard confession of judgment paragraph. The agent is required to act in good faith (defined as “honesty in fact”) and act only within the scope of authority granted in the power of attorney. In order to facilitate compliance with this, the scope of authority of the confession of judgment must be clearly outlined in the provision itself. Most commercial leases that include a confession of judgment provision already do this. Additionally, acting in good faith only requires that the landlord adhere to the lease provision. Thus, an insertion of language under which the signatory acknowledges that such actions by the landlord are not contrary to the tenant’s best interest and do not constitute an absence of good faith or an action beyond the landlord’s scope of authority should seemingly be sufficient.
However, Section 5601.3(a)’s new language also requires that the agent act in accordance with the principal’s reasonable expectations, to the extent actually known by the agent, and, otherwise, in the principal’s best interest. This is problematic for landlords because, when acting on a confession of judgment clause to protect their rights or enforce their remedies, a landlord’s actions are almost exclusively intended to benefit itself and not the principal. As this cannot be waived, a landlord’s recourse is merely to insure that the clause is very clear on what will happen if the landlord exercises its right to confess judgment. In addition, it may be beneficial to include language that the granting of the confession of judgment is a condition for the landlord to enter the lease, which is beneficial to the tenant.
In order to further adhere to the statute, landlords will now also have to specifically disclaim all Section 5601.3(b) requirements in the confession of judgment language or itemize those provisions the attorney would like to abstain from. As it is reasonable, allowable and simpler to abstain from all, this seems to be the most likely path.
Lastly, the above duties contained in Section 5601.3 apply to actions undertaken after January 1, 2015. Therefore, if a tenant and landlord executed a lease containing a confession of judgment prior to January 1, 2015, under which they did not waive Section 5601.3(b), the agent would have to comply with all components therein. Thus, when entering into amendments to existing leases, modification of the confession of judgment clause should also be incorporated in order to include the necessary waivers to the clauses outlined herein.
1 For more information, read our previous Real Estate Update, “Confession of Judgment and Personal Guaranties: Two Important Remedies for Landlords with Defaulting Tenants,” available at http://www.pepperlaw.com/publications/confession-of-judgment-and-personal-guaranties-two-important-remedies-for-landlords-with-defaulting-tenants-2012-01-23/.
2 Greystones Bank v. Grove Estates, LP, 2012 Pa.Super. 274 (2012), affirmed 2013 Pa. LEXIS 2855 (Pa. 2013), relaxed certain previous requirements, holding that a signature need not necessarily appear on the same page as the warrant to “directly relate” to it. The Graystones Bank court further held that, where an agreement containing a warrant has been amended, the amendment need not restate the warrant or specifically incorporate the warrant if the amendment does not constitute a novation. In essence, if the amendment is a modification of the existing agreement but does not replace the parties’ respective rights and duties with a new agreement, the original warrant of attorney will stand, and confession entered upon it will be valid.
3 20 Pa. Cons. Stat. § 5601(b)(3)(i). Subsections (b)(3)(ii), (c) and (d) do not apply to a power or power of attorney contained in an instrument used in a commercial transaction that simply authorizes an agency relationship. As further defined by HB 1429, this includes (iv): A warrant of attorney conferring authority to confess judgment. 20 Pa. Cons. Stat. § 5601(e.1)(1.1).