With a growing number of commercial loan delinquencies, lenders and borrowers are trying to come to terms with their options. In order to try to provide framework for the negotiation process, lenders will often ask a borrower to sign a pre workout agreement (PWA). I have two words of advice for borrowers who are asked to sign a PWA: Borrower Beware.
Here are just a few items that should merit your attention.
First, many lenders will ask borrowers to agree that any information learned in the negotiation process would be inadmissible in the event litigation ensues. I would never advise my client to sign such a document. By doing so, you are effectively waiving any legal rights you may not even know you possess.
Second, the PWA may include seemingly innocuous representations by the borrower. For example the PWA may ask the borrower to simply acknowledge that the loan is in default; or agree to the outstanding balance; or confirm that there are no extraneous, unwritten agreements which may impact the written documents. These provisions (and the language surrounding them) need to be read carefully.
Third, a PWA may ask the borrower to pay the fees for lender’s counsel. Do not agree to this without getting advice from your own counsel. This is a land mine.
I’m not a fan of the PWA. I think it unnecessarily puts the borrower in a defensive posture. I also believe they are a waste of time. The time spent negotiating a PWA could be spent actually negotiating substantive terms. Lenders and special servicers are already stretched thin these days. A PWA is often an extra and unnecessary burden.
I do believe borrowers have certain obligations they must meet in order to try to have a successful workout. My rules for borrowers are:
1. Communicate. Do not go dark. Do not make the lender guess what you are up to. They will usually guess that you are up to no good.
2. Pick up your mail. This is a subset of Rule 1.
3. Come with clean hands. Do not divert cash flow from the collateral. Do not attempt to transfer the collateral without consent.
4. Do not rely on any oral representations made by the lender (i.e. “we may be able to do x”). Nothing is certain until it is in writing. Do not be lulled into a false sense of security.
5. Keep a healthy perspective. These times are difficult for lender and borrower alike. Don’t take it personally.