- Lender Pre-Negotiation Agreements: Not Just for Workouts Anymore
- July 13, 2009 | Author: Michael J. O'Grady
- Law Firm: Frost Brown Todd LLC - Office
In the current credit market, many of our business and developer clients are requesting extensions or other modifications to their existing credit facilities, rather than seeking to refinance. Our lending clients are generally responding to those requests with a proposed, non-binding term sheet created by the lender. With scarce alternatives to such an extension or modification of an existing credit facility, borrowers can be backed into a corner with an impending maturity date if term sheet negotiations break down. In that context, the assertion of litigation claims against a well-intentioned lender which is ultimately unable to approve the borrower’s extension or modification request is unfortunately becoming more prevalent.
Our lending clients will often not contact our firm until after a term sheet for a modification is fully-negotiated. While this strategy works well in a credit environment where a successful term sheet negotiation is almost assured, in the current environment, some consideration should be given to the involvement of counsel earlier in the process to advise on potential lender liability issues and to prepare a Pre-Negotiation Agreement for signature by the borrower.
A Pre-Negotiation Agreement is a relatively simple document that not only serves to protect a lender but also helps to manage, at the outset of discussions over an extension or modification, the expectations of the borrower. Before issuing a proposed term sheet, we suggest that lenders carefully consider the purposes of such a Pre-Negotiation Agreement and the need for one, even outside of the workout context, whenever there is a possibility that negotiations could break down with an existing borrower that has an impending maturity date.
The scope of a pre-negotiation agreement can vary considerably. On one end of the spectrum, such a document can include comprehensive releases, interim forbearance arrangements, and representations and warranties by the borrower regarding any number of matters. While these terms might benefit the lender, they can also require more negotiation than the proposed transaction itself. As a result, protracted discussions over an extensive Pre-Negotiation Agreement may tend to undermine the basic purpose of the document, which is to have some agreement, before negotiations commence, regarding the parties’ obligations, or lack thereof, with respect to such negotiations. In light of this, some key terms should be the focus of the document.
No final agreement exists until we sign. The hallmark of the Pre-Negotiation Agreement is an affirmation by the borrower that the lender is not obligated to extend or modify the existing transaction and that any discussions, terms sheets, correspondence and the like which are exchanged between the parties will not constitute an agreement to so extend or modify, i.e. a definitive agreement to extend or modify must be in a document signed by the parties. This allows the lender and borrower to more freely discuss various proposals with less concern that the borrower will subsequently allege that a binding agreement was reached between the parties by virtue of discussions or correspondence. This term of the document should also include a statement that the parties will not rely on any statements, draft documents, term sheets, letters or other similar items and that either of the parties may terminate negotiations at any time.
All discussions and writings are confidential and inadmissible. In order for both the borrower and the lender to be able to be forthcoming regarding their respective positions, a term requiring confidentiality and inadmissibility should be included. While settlement negotiations are generally inadmissible, discussions over the terms of an extended or modified transaction might not be considered within the scope of settlement negotiations. Further, the fact that a discussion or document might be inadmissible does not preclude one party from openly disclosing it outside of court to the media or another third-party which could use the information obtained to its advantage.
Loan documents and no waiver of rights reaffirmed. Before entering into discussions about how to modify loan documents, the lender should be assured that it is not waiving any rights under the documents (including the right of enforcement during negotiations) by negotiating with the borrower and that the loan documents remain in full force and effect. A simple affirmation of each of these points should not be objectionable to the borrower and should be included.
Borrower-authorized representative identified. During the term of the loan, the ownership, officers or managers of the borrower might have changed notwithstanding prohibitions in the loan documents regarding such changes. This is more often the case where a property or asset has not been performing well. Lenders should exercise caution whenever there appears to be a change in ownership or management or a rift among the ownership, officers or managers of a borrower. In that regard, a Pre-Negotiation Agreement should include the identity of the designated representative for the borrower. The document should also be signed by the broadest group of management and ownership which is reasonably attainable, as well as any guarantors.
Costs borne by borrower. The existing loan documents likely include a term that charges the borrower with costs incurred by the lender in connection with the financing, such as reasonable attorneys’ fees. In some cases, this term of the loan documents limits the borrower’s liability for such items to costs incurred in connection with the initial transaction and any enforcement actions by lender. Negotiations over the terms of an extension or a new loan from the lender could arguably be excluded from a narrowly-tailored costs definition in the loan documents. Therefore, a good Pre-Negotiation Agreement should include a provision which charges the borrower for the lender’s costs associated with the negotiations and the documentation of any transaction which results from such negotiations. Depending on the circumstances, a deposit to secure the obligation of the borrower to pay those costs might be appropriate.
Each of the above terms should be incorporated into a Pre-Negotiation Agreement. Other terms, such as releases, certain representations and warranties, and interim forbearance terms could certainly be included if they can be obtained without protracted discussions; however, in the case of an extension or modification, rather than a true workout, a simpler Pre-Negotiation Agreement, which addresses these essential points, could be the better option to allow negotiations to begin immediately.