Pre-Negotiation Letters During COVID-19
With vast business disruption taking hold amid the COVID-19 pandemic, many lenders and landlords will receive requests from borrowers and tenants for loan and lease modifications, workouts, rent abatements, forbearance arrangements and other accommodations. One important consideration before commencing negotiation of any such request is the execution of a pre-negotiation letter. Setting forth rights, obligations, limitations, protections and a host of other matters, pre-negotiation letters establish a framework for the parties to discuss amendments or modifications to existing structures and agreements, and, in turn, help facilitate open dialogue and negotiations by setting ground rules for discussions and avoiding inadvertent waivers or compromising of rights. Accordingly, the pre-negotiation letter should be proffered, negotiated and executed as early in the process as possible.
A pre-negotiation letter should include the following:
1. Recognition/acknowledgment that the borrower or tenant requested the negotiations and that the lender or landlord is willing to enter into negotiations subject to the terms and conditions outlined in the letter.
2. Lender’s or landlord’s reservation of rights under the applicable documents, which the parties acknowledge remain in full force and effect. A further acknowledgment that the negotiations do not act as a waiver of any of those rights.
3. The applicable modification will not be binding until all terms are reduced to a written agreement, executed and delivered by each of the parties to be bound.
4. Subject to Federal and State COVID-19 related statutes, rules, regulations, directives and other requirements, by entering into negotiations neither party assumes an obligation to modify, amend or restructure the loan or lease transaction in any manner.
5. For loans secured by collateral, an express acknowledgement and confirmation that the underlying collateral remains unencumbered by any lien (other than the applicable loan documents) and will remain as such on a going forward basis.
6. The negotiations may be terminated by either party at any time.
7. Acknowledgment that the pre-negotiation letter constitutes a binding agreement and is the entire agreement between the parties with respect to the negotiations.
8. A confidentiality provision, which also acknowledges that the negotiations are settlement discussions and therefore not admissible in any administrative or court proceeding.
9. Acknowledgment that the borrower or tenant should not forgo alternative opportunities in the event that the negotiations do not lead to a formal agreement.
10. Waiver and release of all future claims related to statements made during negotiations.
11. Additional provisions such as waiver of trial by jury, judicial interpretation, forum selection, representations regarding authority, survival of the agreement beyond the negotiations, etc.
Note: A pre-negotiation letter typically should not include a forbearance provision, given that forbearance will be part of the negotiations themselves.
As the particulars of each pre-negotiation letter must be tailored to the individual transaction and the fluid regulatory and legal landscape (which, in certain circumstances, may even mandate unconditional forbearance, thereby possibly rendering a customary pre-negotiation letter moot or even impermissible) it is important to consult with counsel before preparing, negotiating or executing a pre-negotiation letter.
For more information:
Jennifer S. Recine
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