Payment of taxes and other claims: Overview, definition and example
What is payment of taxes and other claims?
Payment of taxes and other claims refers to a contractual obligation requiring a party, often a borrower or entity, to pay all applicable taxes, fees, or other claims related to their business operations or financial obligations. This clause ensures that such liabilities are settled in a timely manner to avoid penalties, liens, or other adverse consequences that could affect the other party, such as a lender or investor.
For example, a borrower in a loan agreement may be required to pay property taxes on collateralized real estate to prevent tax liens that could impact the lender’s security interest.
Why is payment of taxes and other claims important?
This provision is important because it protects the interests of the counterparty, such as a lender, by ensuring that taxes and other financial obligations are fulfilled, thereby reducing risks like liens or legal disputes.
For borrowers or entities, it emphasizes the need to maintain compliance with tax regulations and other claims, avoiding potential legal or financial repercussions. For lenders or counterparties, it provides assurance that their security or investment is not compromised by unpaid liabilities.
Understanding payment of taxes and other claims through an example
Imagine a company secures a loan to purchase commercial property. The loan agreement includes a clause requiring the company to pay property taxes and any utility fees associated with the property. If the company fails to do so, the lender could face risks such as a tax lien on the property, which could reduce the lender’s ability to recover funds in the event of default.
In another example, a business lease agreement requires the tenant to pay local business taxes and maintain payments for utilities and other services. This ensures the landlord is not held responsible for these obligations, preserving the property’s standing with local authorities.
An example of a payment of taxes and other claims clause
Here’s how a payment of taxes and other claims clause might appear in an agreement:
“The Borrower agrees to pay all taxes, assessments, and other claims lawfully levied or assessed upon its property, income, or operations before such taxes, assessments, or claims become delinquent. The Borrower further agrees to provide proof of payment to the Lender upon request. Failure to comply with this provision shall constitute an Event of Default under this Agreement.”
Conclusion
The payment of taxes and other claims provision ensures that financial and legal obligations are fulfilled, protecting both the responsible party and the counterparty from risks like liens, penalties, or disputes. For businesses, this clause underscores the importance of compliance with financial obligations. For lenders or counterparties, it offers assurance that their interests are safeguarded. Clear drafting of this provision promotes transparency and accountability, reducing potential conflicts.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.