Loans Gone Bad: Pre-Workout/Pre-Negotiation Agreement Issues for Lenders

When a Lender is faced with a Borrower in default, one of the first steps after a Lender examines the Borrower’s loan documents is to start negotiations with the Borrower by sending a Pre-Workout/Pre-Negotiation Agreement.    If done correctly, a Pre-Workout Agreement can help bring about a quicker resolution and preserve the Lenders rights under the loan documents.

1. Before Sending the Agreement –Talk to the Loan Officer and Carefully Review the Loan File

Generally, courts have held that neither the Lender or the Borrower is obligated to engage in workout negotiations, so before sending out the Pre-Workout Agreement, a Lender should determine the nature of the relationship between the parties.  This is an important step, because if prior actions and conversations between the parties could possibly have led the Borrower reason to believe the Lender will not enforce its legal remedies, then there is a greater risk of the Borrower pursuing a bad faith lender liability action.   Simply reviewing the loan file and speaking with the loan officer to see if any verbal promises or emails sent making promises were made before attempting a loan workout or foreclosing could avoid a bad faith lender liability lawsuit down the road.

2.  Be Explicit: Discussions are Non-Binding and Set an End Date

Set the exact date in which negotiations will end and include a mutual termination provision in which either party may terminate the negotiations at any time for any reason. The Lender should confirm negotiations and draft documents are non-binding and not admissible in a legal proceeding and that any loan modification proposed is not effective until final execution of a settlement agreement.

3.  Maintain Status Quo

Generally the Pre-Workout Agreement should seek to preserve the Lender’s rights and remedies already granted in the original loan documents, indentify critical loan documents, list the Borrower’s events of default, list the amount the Borrower owes, and confirm the Borrower’s authorized representative.  The Lender may also want to confirm they have adhered to the terms in the loan documents, fully funded the loan, and confirm they are not obligated to make any further advances under the loan.

4. Pre-Negotiation is Not the Best Time to Better a Lender’s Position.

While it may be tempting for a Lender to better its position in the pre-workout agreement, this may lead to extended and costly negotiations over the terms of the letter, kill the negotiation before it starts, and/or cause the pre-workout Agreement to be unenforceable.  When a Lender tries to better their position, for example by having a Borrower unilaterally waive their rights or escrow a deed to property, the Agreement may be ruled unenforceable.  Some courts view these actions as suspect and may throw out the Agreement on the grounds that the Borrower was under duress and Borrower has made their position materially worse in exchange for nothing.  If a Lender seeks a release of claims by the Borrower, then a qualified attorney should be contacted to engage in meaningful cost-benefit analysis of whether or not to forge ahead with such a request.

DISCLAIMER: **The information appearing in this article does not constitute legal advice or opinion. This article is for informational purposes only. Melwani & Chan LLP only provides advice and opinion upon engagement with respect to specific factual situations.**