For many real estate borrowers and lenders, it is time to consider forbearance arrangements and loan restructurings. Even if April rents were paid, owners and lenders need to prepare for potentially lengthy disruptions. Any such discussions between borrowers and lenders should only occur after the parties have entered into a pre-negotiation agreement (PNA). Making promises, or making requests and explaining the need for forbearance, without a PNA can expose either party to claims. The PNA allows borrowers and lenders to freely engage in discussions (and not be bound until a formal agreement is executed). PNAs are critical table-setting exercises that help negotiations get underway.

Although the exact details of a PNA will vary from deal to deal, a well-negotiated PNA will need at a minimum to address: (i) the non-binding nature and confidentiality of any discussions that may occur; (ii) the fact that no party is bound until a final fully executed restructuring agreement is executed by the parties, (iii) the fact that discussions may be terminated at any time (for any reason or no reason) and (iv) the fact that discussions are inadmissible in a court proceeding. Basically, the PNA allows for discussions to be “neutral” and without prejudice to or waiver of any party’s rights—so the PNA maintains the status quo.

More specifically:

• Obligations. Perhaps the single most important provision in a PNA is the agreement that discussions are non-binding—that the parties have not agreed to modify the terms of the loan documents unless and until a modification or “restructuring agreement” has been executed and delivered by both parties. The PNA should provide that both parties are free to walk away and terminate discussions at any time for any or no reason. Borrowers and lenders benefit from these provisions as they allow the parties to speak “freely”—without fear of having discussions “used” against them.
• Confidentiality. If the non-binding nature of the discussions and the ability of the parties to walk away is the most important part of a PNA, the confidentiality provisions are a close second and are usually twofold. First, many PNAs treat the discussions as part of a settlement negotiations between the parties—making anything disclosed during such discussions confidential and inadmissible in court. This is important and beneficial to both sides. Confidentiality provided by classifying the discussions as settlement negotiations ensures that lenders do not have to worry about proposing terms only to find them revealed during litigation—and borrowers do not have to fear that being honest about their situation will result in their admissions being used against them later. Second, such provisions ensure that borrowers can come forward and provide the documents that are necessary for the lender to do its due diligence.
• Waivers. Often, the parties waive any claim they may have against each other arising out of the negotiations, which is natural corollary to the confidentiality provisions treating the discussions as settlement negotiations.
• Release and Estoppels. Some lenders will seek a release from the borrower, as of the date of the PNA, relative to offsets, defenses or claims in connection with the loan. Provided no such offsets, defenses or claims in fact exist, borrowers may consider delivering such releases. Some lenders also request “estoppels” ranging from the relatively minor (such as an acknowledgement that the loan documents are the full set of agreements between the parties) to the more concerning, such as a stipulation the borrower is in default. Lenders, in particular, need to think carefully whether the inclusion of these estoppel provisions advances their position—or simply prolongs the preliminary stages of the workout. However, borrowers should be aware that lenders may be hesitant to negotiate with a borrower unwilling to acknowledge the actual conditions they face. Borrowers whose lender has included these estoppels, and whose projects were already troubled before COVID-19, may want to be very careful how the estoppels on the one hand and the confidentiality and waiver provisions on the other interact, so that borrowers do not inadvertently admit to something that could be used against them in court and that they intended to remain protected.
• Practical Tips. Be sure all parties are bound—including guarantors—and confirm who has authority to negotiate on behalf of borrower, sponsor and guarantors. Be sure to execute the PNA before substantive discussions begin.

PNAs can contain traps (for both borrowers and lenders) and need to be carefully negotiated. Their role and importance cannot be understated. Do not make promises or commitments, and do not ask for forbearance of modifications, without a PNA in hand.