CMBS Pre-negotiation Agreements

by Baker Donelson
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Pre-negotiation agreements ("PNA’s") are contractual arrangements in which a lender and a distressed borrower agree to negotiate the terms of a potential workout or settlement. The primary purpose of a PNA is to foster an open, good faith dialogue among the parties to the loan while protecting the parties from unknowingly waiving valuable rights contained in the loan documents. Although not unique to the CMBS world, pre-negotiation agreements in the CMBS context often raise a number of issues that should be considered at the onset of potential settlement discussions.

One of the primary benefits of entering into a PNA is to provide protection to the lender. The protection afforded by a PNA prevents a distressed borrower from claiming a definitive agreement was reached as a result of simple non-binding negotiations or settlement discussions. Another important aspect of a PNA is that it sets forth the sincerity of both parties to negotiate in good faith in an attempt to work out the loan at issue; a party’s hesitation to sign a PNA and engage in open dialog may indicate bad faith or an unwillingness to compromise.

Many provisions are important to include in a PNA. While the scope and complexity of a PNA will vary widely based on the familiarity of the parties and nature of the loan, at a minimum, a PNA should set forth a basic description of the current status of the relationship between the lender and borrower, including an admission of all defaults and an affirmation of all loan covenants. A properly drafted PNA should also provide that any negotiations, discussions, draft documents, or loan modification proposals are non-binding until and unless a definitive agreement is signed and executed. A PNA should include provisions that seek to preserve the lender’s rights and remedies already granted under the loan documents, should provide for the mutual termination of the PNA by either party for any reason, and should confirm the ground rules governing settlement discussions. Other provisions often found in well-drafted PNA’s include: no claims against lender provisions, provisions setting forth the method, time, form, and structure of communications; provisions designating authorized representatives; and, provisions providing that all discussions and writings be confidential and inadmissible for evidentiary purposes.

From a legal standpoint, a PNA is a contract and must satisfy certain contractual requirements to be found enforceable. Generally, the creation of a contract requires that there be adequate consideration given and mutual assent to a certain and definite proposition. Because courts typically hold that neither lenders nor borrowers are obligated to engage in settlement or workout discussions, most courts find that a lender's agreement to enter into negotiations is sufficient adequate consideration, thus additional consideration need not be set forth in the PNA itself.

In Bankers Trust Co. v. Basciano, 960 So. 2d 773, (Fla. 5th DCA 2007), the Florida 5th District Court of Appeal directly addressed the contractual requirement of mutual assent as it related to an oral agreement made contemporaneously with a PNA. Bankers Trust Co. involved an Orlando based hotel that defaulted on a loan held by Bankers Trust. Following the default, Bankers Trust, acting through its special servicer, executed two PNA’s which were designed to govern any loan settlement or forbearance negotiations between the hotel and Banker’s Trust. The Parties also made an oral understanding contemporaneously with the PNA’s which provided that "[the special servicer] promised to work cooperatively with [the hotel] to restructure the loan in a manner consistent with the appraisal's valuation of the hotel in order to give the hotel a reasonable chance of succeeding as a going concern." The Court held that, notwithstanding the PNA’s, the oral agreement fell short of an enforceable contract and thus could not form the basis for a breach of contract claim. The Court stated that the oral agreement was nothing more than "an agreement to agree in the future" and noted that "[w]here essential terms of an agreement remain open, and subject to future negotiation, there can be no enforceable contract."

In short, a simple, understandable, well-drafted PNA, can be an invaluable tool to lenders and servicers, especially in light of the increasingly creative ways parties seek to modify, discuss, and settle modern loan disputes.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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