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Forebearance Agreement Drafting Tips

By: Jay L. Welford - LEAN Attorney at Jaffe, Raitt, Heuer & Weiss, P.C.

Before a lender/lessor engages in a negotiation with its borrower/lessee regarding a proposed or requested forbearance arrangement, it is recommended that the following topics be used as a checklist for the negotiation process and for inclusion in the forbearance agreement itself. Skilled counsel can customize these concepts to maximize the leverage of the lender/lessor and streamline the recovery process, should the forbearance arrangement not result in the hoped-for outcome.

• A recitation of the loan or lease documentation—the recitals should include a description of the material agreements, executed, to date, by the borrower/lessee and all guarantors, including all notes, loan agreements, security agreements, guarantees, amendments, waivers, leases, schedules, acceptance certificates and other material documents.

• A ratification of the enforceability of the loan or lease documentation—the borrower/lessee and all guarantors should ratify and reaffirm the enforceability of the loan or lease documentation.

• A ratification of the indebtedness—a description of the indebtedness should be set forth, including principal, interest, late fees, remaining payments due, attorneys’ fees, etc. as of a given date and the borrower/lessee and all guarantors should acknowledge the same, including an affirmation that all payments have been properly applied.

• An acknowledgment of the defaults—the predicate of any forbearance is the existence of a default. The agreement should specify the defaults and each borrower/lessee and guarantor should acknowledge the same as having been properly declared.

• A specific period of forbearance should be identified—based on the existing defaults, the lender/lessor should agree to forbear from taking further action based on the defaults or a prior acceleration of the debt, only for a defined period. During the defined period, the borrower/lessee should be obligated to meet certain defined milestones (refinance of the debt, sale of collateral, obtaining an equity infusion or other action).

• Early forbearance termination events should be delineated—defaults which would trigger an earlier termination of the forbearance period should be set forth. These could include failure to meet given milestones by a given date (future payment obligations, receipt of a commitment letter or LOI, failure to meet budgeted revenue targets or exceeding budgeted line item expenses) or default under any other provision of the loan or lease documentation or other key third party agreements.

• Shore up any defects in your collateral position—use the forbearance agreement as an opportunity to clean up any defects in your loan or lease documentation, including missing installation certificates, amendments to collateral descriptions, corrected UCC financing statements, missing subordination agreements, needed landlord waivers, etc.

• Make a collateral grab—in addition to, or in lieu of, additional payment obligations, use the forbearance arrangement as an opportunity to grab additional collateral and/or guarantees that might be available.

• Terminate any outstanding lender/lessor commitment obligations—have the borrower/lessee and all guarantors acknowledge that all outstanding commitments to lend or provide other financial accommodations are terminated.

• Obtain a waiver and release of all claims—the forbearance agreement should contain a robust waiver, signed by the borrower/lessee and all guarantors, of each and every claim that they have or could assert against the lender/lessor through the date of the forbearance agreement. This will cut off lender liability and any other claims or defenses which the borrower/lessee and/or guarantors may have. It should be fully enforceable, as it is given in exchange for new consideration—the extension of the loan/lease relationship.

• Escrow documents that accelerate the recovery/foreclosure process—to expedite recovery against collateral or assets if the forbearance milestones are not met, place into escrow documents which will accelerate the foreclosure steps. These could include bills of sale in lieu of foreclosure, stipulations to agreed upon orders of replevin and/or deeds in lieu of foreclosure. Post-default waivers of redemption periods are also permissible under the UCC, so don’t hesitate to include those as well.

• Build in bankruptcy protections—a borrower/lessee’s ace in the hole is a bankruptcy proceeding. Anticipate what could happen in a bankruptcy and try to minimize the delay or expense of a bankruptcy through language in the forbearance agreement. While not always enforceable, have the borrower/lessee agree to an adequate protection payment amount or set a deadline by which a lease must be assumed or rejected. As a further deterrent to a bankruptcy filing, seek a specific acknowledgment and waiver from the guarantors that in the event the primary obligor seeks bankruptcy protection, the guarantors nonetheless agree that pursuit of their guaranty obligations may proceed without objection or reference to the status of the bankruptcy proceeding.

• Include an integration clause—it is critical that the forbearance agreement provide that it represents the complete agreement of the parties as to the terms of the forbearance, so that parole evidence of other collateral agreements cannot be brought forward later. The forbearance agreement should indicate that to the extent there is a discrepancy between the terms of the loan/lease documentation and the forbearance agreement, the forbearance agreement will control.

Depending on the circumstances, there may be other provisions to add to a forbearance arrangement. Obviously, each transaction is fact specific.

Jaffe, Raitt, Heuer & Weiss, P.C. is a full service, 110 attorney corporate law firm serving the State of Michigan. Further contact or questions should be directed to Jay L. Welford, jwelford@jaffelaw.com, 248-727-1466.