As the ramifications of the Covid-19 pandemic for lenders and mortgage borrowers will unfold over time, at this point we know that lenders and borrowers will communicate frequently and extensively regarding potential loan modifications and other accommodations. . Lenders are well advised to require a pre-negotiation agreement, often referred to as a “PDA,” as a prerequisite for these communications.

A PNA is an agreement between a borrower and a lender to allow the lender to communicate with the borrower regarding a possible loan modification, waiver, or other accommodations without affecting the lender’s ability to enforce loan documents. . The main objective of the agreement is to preserve the status quo during negotiations and to prevent the borrower from using the negotiations as a basis to oppose any current or potential execution effort by the lender, or as a basis for bringing lender liability claims against the lender, claiming that during the negotiations the lender had undertaken to amend the loan documents, that the correspondence exchanged during the negotiations itself constitutes a loan modification, that the borrower correctly relied on the lender’s statements to forgo refinancing opportunities and incur transaction costs, etc. Even if a borrower is ultimately unable to assert these claims, their potential use to oppose a lender’s summary judgment motion and thereby prolong enforcement proceedings and increase the borrower’s leverage should be a concern to the lender. The lender will generally require the parties who have taken out guarantees on the loan to adhere to the PNA in order to prevent guarantors from making similar claims and to prevent guarantors from claiming that the PNA itself has excluded certain means of payment. defense and thus increased the number of guarantors. ‘risk and raising so-called “security defenses” on this basis.

It is advisable to enter into a PNA as soon as the lender anticipates negotiations with the borrower. Normally, this means that a default occurs, when the borrower asks the lender to discuss a modification or waiver, or when a default is reasonably anticipated (for example, when the lender has reason to believe that the borrower will not be able to refinance or meet the conditions for exercising an extension option at an approaching maturity date or to meet any other requirement in under loan documents, such as making a scheduled amortization payment or continuing to pay monthly debt service). In the current circumstances, the universe of loans for which these events can be anticipated has broadened considerably.

From a lender’s perspective, a PNA should at a minimum include the provisions necessary to preserve the status quo during negotiations. These usually include agreements stating that (i) negotiations, which should be defined broadly to include all discussions, meetings, conferences, correspondence, emails, exchanges of modalities sheets and draft documents and all other communications, are not binding unless and until a binding written agreement has been signed and delivered, (ii) either party has the right, at any time, to put end discussions at its sole discretion, for whatever reason, (iii) the borrower is not entitled to rely on negotiations leading to a settlement and should not forgo refinancing opportunities, and (iv ) the NAP does not constitute an agreement by the Lender to refrain from exercising its rights and remedies under the Loan Documents during negotiations. While a forbearance agreement is sometimes made as part of turnaround discussions, it is usually documented in a separate forbearance agreement that is negotiated and concluded as a result of the ANP. An abstention is often more complicated than a PNA and involves more negotiation. The conclusion of an ANP before negotiating a forbearance agreement gives these negotiations the protection of the ANP and allows for a simultaneous discussion of the terms of forbearance and final settlement. To reiterate, an NAP simply preserves the status quo as to discussions between the borrower and the lender and provides that the discussions themselves are not binding. A PNA is NOT abstention, and the lender retains the right to initiate, continue, interrupt, continue or otherwise exercise its remedies despite the existence of the ANP. Typically, however, a lender will not aggressively pursue its remedies when a PNA has been entered into.

In a syndicated loan, the PNA is entered into by the administrative agent and covers all discussions between the borrower and the administrative agent, as well as all discussions between the borrower and other lenders in the syndicate. While co-lenders are appointed and all arrangements are also for their benefit and protection, co-lenders, however, will generally not be signatories to a NAP and will rely on the capacity of the administrative agent. to protect their interests. In addition, to preserve the unity of the lender group, a NAP covering a syndicated loan generally provides that the borrower can only discuss the loan with the administrative agent. When real estate is financed by both mortgages and mezzanine loans, the mortgage lender and the mezzanine lender must each enter into a separate NAP with their respective borrower. The holder of a preferred share should also consider entering into a PNA in order to protect their interests during recovery discussions.

The lender will generally want the ANP to cover past and future discussions. While technically this goes beyond preserving the status quo on the date the ANP is entered into, a lender might find it unacceptable for a borrower to preserve their right to make claims based on an initial conversation. that he had with the borrower before the NAP was prepared and entered into. Lenders are advised to do their utmost to postpone these conversations until the ANP is concluded. Beyond cleaning up these past discussions, NAPs will sometimes include some or all of the following, which are beneficial to the lender: (i) a ratification of existing loan documents, (ii) a statement of the outstanding amount of debt, (iii) an acknowledgment that the lender has performed all of its obligations under the loan documents, (iv) when the loan is in default, an acknowledgment of default and a waiver of defenses, (v) a discharge of claims against the lender, and (vi) an agreement that allows the lender to discuss the loan and the property with other parties providing debt and equity financing to the property and other creditors. The inclusion of the above may be helpful to the lender both in pursuing enforcement proceedings and in protecting against lender liability claims. Whether and to what extent the above elements are included is usually determined by negotiations between the lender and the borrower, and their inclusion or exclusion ultimately depends on the particular circumstances, relationship and authority. relative negotiation.

Pre-negotiation agreements are widely required by real estate lenders as a policy and borrowers have come to understand and accept that they are necessary for lenders to discuss loan modifications and waivers, and that they do not There is no stigma attached to it. . While the circumstances brought on by the pandemic are extremely unfortunate and neither borrowers nor lenders are responsible for the economic hardship it inflicts, NAPs are both appropriate and necessary to facilitate the discussions that will be necessary to mitigate the consequences. of the pandemic.