Richard S. Fries and Todd B. Marcus present the key concepts and provisions that should be included in effective commercial real estate loan forbearance agreements in their New York Law Journal article "A Primer on Today's Commercial Loan Forbearance Agreement."
First and foremost, a pre-workout agreement is required prior to the actual commercial loan workout, because this agreement establishes the rules and certain protections for the lender such as that (i) no communications between the parties will constitute an agreement by the lender, or a waiver, forbearance or estoppels, by the lender, of any of its rights and remedies and (ii) no negotiations will be binding on either party until the parties memorialize their agreement in writing.
Second, the purpose of a forbearance agreement is to grant the borrower legal/economic concessions in exchange for increased collateral and the right to invoke its remedies. Certain concessions and enhancements must be negotiated by the parties.
Lender's concessions may include some of the following:
Concession #1: Forbearance from accelerating the loan and pursuing foreclosure and other remedies;
Concession #2: Extension of maturity date;
Concession #3: Economic or covenant default waivers;
Concession #4: Suspension of required principal amortization and interest installment payments and
Concession #5: Partial release of real estate collateral or agreement to accept release prices.
Lender enhancements may include some of the following:
Enhancement #1: Additional collateral;
Enhancement #2: New, partial or full guaranty of a previously non-recourse financial obligation;
Enhancement #3: Additional loan covenants, financial reporting or monitoring rights;
Enhancement #4: A lock box or the triggering of use of a lock box feature and
Enhancement #5: Control of the project revenue through a cash management agreement.
The forbearance agreement should include essential provisions such as the following:
Provision #1: Indebtedness Acknowledgment
- Borrowers acknowledge that the debt is due and payable in full immediately without defense
Provision #2: Loan Document Ratification
- The lender requires that all documentation defects be cured to perfect its security interests in the collateral
Provision #3: Waiver of Defenses and General Release
- The lender will require that the borrower sign-off that it does not have any claims against it after the forbearance period ends
Provision #4: Forbearance Expiration Date
- The parties will agree that the lender will not invoke its remedies until a date certain
Provision #5: Suspension of Payments
- The parties will agree that debt service payments will be suspended until the forbearance expiration date
Provision #6: Discounted Repayment Option
- The lender may allow the borrower to repay a discounted amount if the market value of the property has dropped below the loan amount due
Provision #7: Additional Collateral or Additional Guaranties
- Lenders will require additional collateral and additional guaranties
Provision #8: Consent to Remedies
- The agreement should contain a borrower consent to the lender's remedies once the forbearance period terminates
Matthew L. Holden is a New York real estate attorney representing clients throughout New York and New Jersey. Founded by Matthew L. Holden, The Law Offices of Matthew L. Holden, LLC is located in Hackensack, New Jersey.
