Mitigating Risks of Lender Liability Claims When Reworking Troubled Commercial Real Estate Loans

Description

While lenders are careful in drafting loan documents that protect them from a borrower's default, oftentimes loan documents do not provide adequate lender protections when the lender decides to make a loan modification or accommodation. These workout situations can leave lenders vulnerable to liability claims from borrowers and third parties alleging, among other things, that the lender has exercised undue control over the borrower or that a new loan agreement has been reached.

There are many steps and considerations for lenders when developing a workout strategy for a troubled loan. Pre-negotiation or pre-workout agreements can mitigate a lender's risk of exposure to liability claims when entering into discussions with a borrower about a change in loan terms. These agreements establish the ground rules for negotiation discussions and should be executed prior to entering into any loan workout or modification discussions with a borrower.

Pre-negotiation agreements come in a variety of forms and should be tailored to meet the needs and concerns of the parties. Some key elements of a pre-negotiation agreement are that the loan documents remain in full force and effect, an acknowledgment that neither party is waiving any rights or remedies by entering into workout discussions, that all discussions are confidential and inadmissible in any subsequent legal proceeding, and that nothing admitted or disclosed will be binding on the parties unless the discussions result in a written agreement that is signed by all the parties.

Listen as our authoritative panel discusses key considerations for lenders when entering into loan workout or modification discussions with borrowers and provides strategies and tips for mitigating risks and potential exposure to liability claims.