Early Stages of Commercial Lending: Pre-Negotiation Agreements and Other Important Considerations – Commentary

Recognize deficits and develop strategies on both sides – is a workout feasible?
standard letters
Importance of file checking
Important considerations for pre-negotiated agreements
Important Post-Execution Considerations

Recognize deficits and develop strategies on both sides – is a workout feasible?

In the initial stages of a commercial loan, the parties should consider these questions, among others:

  • What are the short and long term goals and strategies?
  • What is the nature of the delay?
  • Will there be a new exit plan?

standard letters

When writing requirement letters, the wording is particularly important. Collection letters often include standard lender protections, such as: B. the ability of the lender to accept installments without waiving any rights and language that makes it clear that payment defaults not specified in the letter (whether known or unknown) will not be reversed. Lenders are often required to specify exactly what they expect from their borrower and/or guarantor, as well as a specific deadline.

Importance of file checking

File verification is especially important for lenders early in the settlement process. The lender should check the file for the following, e.g. B. whether:

  • there are executed copies of all loan documents executed by appropriate parties;
  • you have the original executed promissory note;
  • mortgages or deeds of trust have been registered and whether a certified copy is available;
  • they received the final title policy reflecting the registered mortgage or deed of trust;
  • they have a duly filed copy of the Uniform Commercial Code Funding Statements, including detailed descriptions of the collateral;
  • a letter of credit has expired;
  • the personal guarantor is still alive;
  • the guarantor still exists;
  • Guarantees reaffirmed when loan documents changed;
  • all pledged instruments (e.g. original limited liability company membership certificates) are owned by the lender;
  • There is evidence of current insurance on file; and
  • You have obtained all required third party consents.

Important considerations for pre-negotiated agreements

Pre-negotiation agreements are crucial to ensure both sides protect each other. The goal of a pre-negotiation agreement is to facilitate the exchange of timely and accurate information without such communications being used in court.

The Standard Provisions should clarify that a pre-negotiation agreement:

  • has a non-binding character until the final agreement;
  • can be terminated at any time without giving reasons;
  • does not create any obligation to enter into a definitive agreement;
  • does not waive any existing rights;
  • all communications are inadmissible as evidence in court;
  • must state applicable law;
  • state who is responsible for fees and expenses; and
  • can serve as a barrier.

A lender may also want:

  • confirm existing debts;
  • seek acknowledgment of existing defaults; and
  • declare that no objection is available to the borrower and/or guarantor.

A borrower can try to add the following provisions:

  • a stalemate in the exercise of rights by the lender during open discussions;
  • access to proof of ownership; and
  • how to communicate with third parties, and when and how information may be shared with third parties.

Important Post-Execution Considerations

After entering into a pre-negotiation agreement, the most important aspects to consider are:

  • a forbearance agreement;
  • Loan Modifications;
  • collateral reinforcement; and
  • the enforcement of the agreement.

After a pre-negotiation agreement has been concluded, the main aspects to consider are the following:

  • whether the parties enter into a forbearance agreement with a specific grace period to address default or whether they enter into a loan modification agreement;
  • whether there will be additional collateral in connection with the foregoing; and
  • what steps the lender should take to enforce the loan documents if all else fails.

For more information on this subject, please contact Arren Goldman at Seyfarth by phone (+1 (704) 925-6025) or email ([email protected]). The Seyfarth website can be reached at www.seyfarth.com.

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