Legal Knowledge for Today's Real Estate Marketplace
Pre-Negotiation Agreements: Before You (the Borrower) Signs
Your loan, like so many others, is under water or maturing, income may be declining and you cannot refinance. Yet, you are one of the lucky ones -- the lender seems willing to discuss possibly modifying the loan -- perhaps a simple extension or a lower interest rate, or even a reduction of principal.
But first, the lender wants you to sign an innocent-enough looking document -- the Pre-Negotiation Agreement (sometimes styled Pre-Workout Agreement or something similar). To be sure, Pre-Negotiation Agreements are common and can provide a framework for workout or restructuring "Discussions".
Be careful. Initial drafts of these agreements often contain traps for the unwary which we have helped our clients negotiate away (e.g., inappropriate admissions, waivers, stipulations and releases). Of course, every situation is unique, and the general suggestions in this article may not be applicable to every loan.What's OK
First, keep in mind that the Pre-Negotiation Agreement is important to both the lender and the borrower. One or both may want to confirm: (a) nothing will be binding unless signed and in writing, (b) there is no obligation to negotiate or modify the loan, (c) either may terminate the Discussions, (d) the Discussions are confidential, (e) the Discussions constitute settlement discussion not admissible to establish liability (though they might be admissible for other reasons or in matters involving other parties), (f) neither the Pre-Negotiation Agreement or the Discussions affect enforceability of loan documents or result in waiver of claims by lender - or by borrower (which is different from saying the loan documents have not been modified or the parties have no claims), (g) each party was advised by counsel (if true), (h) borrower is free to pursue alternatives, and (i) identification of authorized representatives of the parties. It is typical for guarantors to sign. Borrowers also may want to confirm they are dealing with authorized representatives of the true owners of the loan.What's Not OK
Lender's often request provisions that borrowers may want to resist. Though many of these provisions may be appropriate in a modification where the borrower is receiving a benefit (even a short forbearance by the lender from exercising some remedies), they may be inappropriate in an agreement simply providing a platform for commencement of workout Discussions. Some concepts to watch out for:
- release of lender from lender liability or other claims
- acknowledgment that the loan documents are still in force without modification
- agreement to pay lender's fees for any workout
- stipulation to relief from bankruptcy stay
- "Discussions" include communications prior to the Pre-Negotiation Agreement (e.g., written or oral proposals on which borrower arguably might rely)
The lender may also ask for provisions (arguably not necessary) that the borrower may want to consider as a gesture of good faith:
- acknowledgement by borrower of missed payments or maturity (try to avoid conceding "default" in case there are defenses)
- lender right to examine books and records (beyond rights in the loan documents)
- acknowledgment that lender will require strict compliance with loan documents
- stipulation that rents constitute "cash collateral" under the bankruptcy code
- possible need for bankruptcy court approval of any modification
- representation regarding no transfers or other loans
Pre-Negotiation Agreements can allow lenders and borrowers to talk to each other comfortably. However, such agreements are different from loan modifications because the borrower is typically not receiving any benefits. Accordingly, the borrower may want to avoid making concessions without consideration.