The Setoff Clause Surprise: How the Other Side Takes Your Money Before You See It

You did the work. You’re expecting payment. But before the check even hits your account, the other side takes a chunk—or all—of it. That’s the power of a setoff clause. These provisions allow landlords, lenders, and vendors to deduct what they believe you owe them from what they owe you. And they often do it without going to court.

What Is a Setoff Clause?

A setoff clause gives one party the contractual right to reduce or withhold payments if they claim you’ve breached another part of the deal. In theory, it saves time by avoiding cross-lawsuits. In practice, it shifts leverage dramatically—because you may never see the money you were counting on.

Why It’s a Surprise

Clients often ask me: “Can they really just take my money without proving it in court?” If the contract has a setoff clause, the answer is often yes. The burden then shifts to you to sue and fight for recovery—meaning you’re starting at zero instead of being paid upfront.

Where Setoff Clauses Show Up

• Commercial Leases: Landlords deduct alleged repair costs, CAM charges, or other fees from rent credits or security deposits.
• Loan Agreements: Banks set off alleged defaults against funds in your own accounts.
• Vendor Contracts: Large companies reduce invoices by claiming you breached service levels or delivery terms.

Why They’re Dangerous

1. No Court First: Money disappears without a judge ever reviewing the claim.
2. Leverage Shift: You’re left chasing funds through litigation instead of being paid upfront.
3. One-Sided Power: Most clauses give setoff rights only to the stronger party.

How to Protect Yourself

• Negotiate Mutuality: If they get setoff rights, you should too.
• Limit Scope: Restrict setoff to clearly defined, undisputed amounts.
• Carve Out Payment Obligations: Insist that invoices must be paid in full, with disputes resolved separately.
• Review Carefully: Don’t gloss over boilerplate—setoff can be buried in the “miscellaneous” section.

Don’t Let Setoff Clauses Erase Your Payments

At JDE Law Firm, PLLC, I review, negotiate, and litigate setoff clauses so clients don’t lose leverage—or their payments—before they ever see them. If you’re about to sign a contract with a hidden setoff clause, or if your payments are being withheld, I’ll fight to protect your rights and your cash flow.

📞 NY: 718-966-0877 | NJ: 732-490-7120

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