Commercial Loan Modification Agreement

The most practical solution is credit training with the existing lender, which plans to change the credit terms on a basis that is acceptable to both the parties and realistic given the expected performance of the real estate market over the modified term. The lender already has the loan on its books and is incentivized to get the credit in the form of performance credit. The borrower wants to get as much of his equity investment as possible and the lender wants to avoid enforcement and charge as much principal and interest as possible for the loan. In addition, (i) the sharp decline in real estate values in all commercial real estate sectors and (ii) higher vacancy rates. In many cases, real estate values have fallen below the guaranteed amount of credit. The problem of defaulted maturities is compounded by the spectre of covenant-based defaults such as debt coverage ratio requirements and borrowing thresholds, the breach of which may constitute direct default or exclude extensions negotiated on terms acceptable to the borrower. Before entering into essential training negotiations, a prudent lender requires the borrower to sign and provide a pre-negotiation agreement. The objective of the pre-negotiation agreement is to maintain the status quo and provide an open forum for productive discussions without fear of litigation. The agreement itself should not be contradictory. Neither party should require the admission that defaults have occurred or that it waives rights arising from loan documents, although lenders often seek to comfort borrowers as to the borrower`s lack of claims against the lender. Pre-negotiation agreements are not always necessary.

We have seen cases where a lender simply responds to a borrower`s request with a simple letter of indulgence, without the need for the pre-negotiation agreement. Regardless of the situation, a lender should avoid making promises that it cannot keep or exerting improper influence on the borrower`s business. If the training negotiations fail, the lender`s liability claims could be invoked. Protection against these rights should be a priority for a lender. While most credit training sessions involve discussions between the lender and their borrower, for the training to be successful, one needs to consider additional parties that will likely be involved…