Yesterday, I did a day trip to Los Angeles with Brian Morris, Greg Erwin & John Nolan. A life insurance company asked us to meet and discuss issues surrounding distressed commercial real estate loans.
It was a reprise of the presentation made by Brian & John at the UT Law School Mortgage Lending Institute. (For this and other materials on distressed investments, click on the "client resources" tab on the home page.)
The "presentation" was really, really good – because it really was a discussion. (The UT Law School MLI really is a presentation. It takes place in two different venues with 400+ people at each place.)
This question caught my attention, as we discussed negotiation agreements:
- If the lender wants the borrower to waive any possible claims against the lender, or even waive specific claims relating to the loan, does the lender need to give some consideration for the waiver (in other words, must the lender give the borrower something in return for the waiver)?
Looking back on my series covering negotiation agreements, I realize that I failed to address this key concept.
My approach side stepped this question. I jumped ahead of the question with this bullet point in my listing of key terms in a negotiation agreement:
- Limited waiver of claims (each party waives any claims relating to the negotiations or discussions; but the waive does not extend to obligations under the loan)
So, why did I make this "limited waiver of claims" suggestion? And what is the answer to the question at our meeting yesterday – do you need consideration from the lender if the borrower waives claims under the loan?
- Yes. The best approach is for the lender to give borrower some consideration for the waiver.
- Typically, the consideration is an agreement (from the lender) to forbear from exercising remedies under the loan (based upon a specific default under the loan) for a specified period of time. (Lender agrees to not exercise remedies for X time; borrower [and guarantor\indmenitor waives claims)
Of course, once the lender agrees to not exercise remedies (for a specific default and for a specific period of time), the negotiation agreement is transformed into a forbearance agreement – which opens up another set of issues – which in turn prolongs the negotiations of the agreement. And results in more delay.
My suggestion is that a lender NOT ask for the waiver of claims in the negotiation agreement. Focus on the limited or essential purpose of a negotiation letter.
Once the negotiation agreement is in place, then work on the forbearance agreement.
Take one step at a time.
If you see if differently, or have a war story, please post your comment below. (And, of course, you might have facts or factors that justify taking a different approach.)