Forbearance is the act of temporarily refraining from taking action against someone or something. In the commercial lending context, forbearance means the lender is refraining from exercising its remedies because the borrower defaulted on its loan.
Forbearance agreements can be simple and straightforward. They can also be complicated contracts with many moving parts, which makes it easy for either party to inadvertently omit an important term or provision.
Non-recourse borrowers hold a significant advantage when negotiating forbearance agreements. Borrowers whose owners have partially or totally guarantied the debt have less room in which to maneuver. In either situation, Borrowers are seeking the latitude they need to either right the ship or lessen the effects of going down with the ship:
- Time Period: Time periods can be fixed amounts of time or they can be flexible upon the achievement of specific goals set forth in the agreement. Borrowers prefer looser language to assert goals were achieved or substantially completed to earn additional time.
- All Defaults: When forbearance agreements state Lenders can exercise remedies only for “new and material defaults”, it is important that the Borrower list every default that occurred before execution of the forbearance agreement. Unlisted defaults could arguably be considered “new” defaults and, therefore, trigger the Lender’s ability to terminate the agreement and start enforcing its remedies.
- Commitment to Fund: This provision should be written such that a ten-year old can explain if and when the Borrower is entitled to receive additional funds from the Lender. Borrowers should fight against the Lender’s reasonable expectation that Lender will decide whether to fund—or make any other decision—in its sole and absolute discretion. Any movement away from the Lender having the unfettered right to make a decision should be considered a victory.
- Loan Modifications: First, Borrowers need clarity as to whether loan modifications are temporary or permanent. The particular modification will determine whether the Borrower seeks a temporary or permanent fix. Second, circumstances that may trigger opportunities for Borrowers to take certain actions (e.g. sell the company or certain assets) should be listed in their individual parts versus in long, run-on sentences.
- Anticipatory Defaults: Borrowers should inform Lenders whenever they have strong reasons to believe they will be complying with a particular covenant. In so doing, Borrowers should then ask for contract language that lists these “anticipatory defaults” that would not result in Lenders being able to take remedial action.
Hiring the right attorney to negotiate your forbearance agreement is essential. It is even more important when guarantors are involved. Proceed accordingly.
