Workouts 101, Part 6: Lenders’ Negotiations and Documentation

The most recent installment of this Workouts 101 series discussed lenders’ business review of loans when they are considering workouts, and gave an overview of early stage moves frequently used by lenders.  This post provides an overview of the negotiations and documentation of a workout agreement from the lender’s side.

Negotiating the workout. Based on its business and legal reviews concerning the loan, and any additional information provided by the borrower, the lender and its counsel will negotiate a workout.  Typically, the parties work off one or more expressly non-enforceable terms sheets which set out the basic terms and conditions.  Usually the basic framework of the workout deal is based on ideas proposed by the borrower.  Many lenders are concerned that if they make the first offer of workout terms, but ultimately are not able to agree on all terms for a loan modification or workout with the borrower, the borrower may later claim that the project failed because the lender overstepped its appropriate boundaries by telling the borrower what to do. 

Regardless of who makes the first offer, however, many issues need to be addressed, including the following:

  • changes in timing and amount to the payment terms of the loan;
  • the possible addition of supplemental collateral or guaranties;
  • tax issues affecting borrower and lender (note that both portfolio lenders and the beneficial owners of trusts holding CMBS loans usually face tax consequences from modifications of loans). 

If the loan did not already impose a lockbox or other cash management arrangement on borrower, a lender frequently will seek to impose one so that it can control the cash generated by the property as the property’s tenants pay rents.

Documenting and closing the workout.  When the basic terms are settled, the workout must be documented.  Frequently additional issues arise at this point; sometimes they can be resolved, sometimes not.  Loan workout documents frequently include some or all of the following:

  •  the basic terms of the deal modifying the loan,
  • express modifications of the loan documents,
  • covenants by borrower parties to do certain things (pay reduced amounts, meet certain financial standards, and the like),
  • acknowledgements, admissions and estoppels by borrower to confirm the outstanding loan amounts and limit potential claims against lender,
  • releases, waivers and covenants by borrower not to sue lender, and
  • reaffirmation of the existing loan documents by all parties, including any guarantors and other secondary obligors. 

The latter is very important, as the failure to obtain the consent of guarantors, indemnitors or other secondary obligors might effectuate a partial or complete discharge of such parties.

As noted above, the documentation usually will include express modifications of the existing loan documents.   The workout documentation will need to be signed, possibly acknowledged, and delivered, and some of the documents will likely need to be recorded.  If the note is modified, an “allonge” – an addendum to the note – typically must be permanently affixed to the promissory note.  Any amendment or modification to a mortgage or deed of trust must be recorded in the appropriate real property records, and any UCC financing statement must be filed in the proper UCC filing office.  And, of course, the borrower will need to pay any fees or charges due to the lender and third parties for the modification before the workout closes.

Long lead items.  Certain items need to be completed early to allow the closing to occur.  Usually a title policy endorsement is required (to insure that the priority of the mortgage or deed of trust is not changed as against other creditors) if the mortgage or deed of trust is modified.  The lender’s counsel will have negotiated the form of any such endorsement and will arrange for its delivery (or the title company’s commitment to deliver the endorsement) concomitantly with the delivery of the loan documents. 

Consents of third parties (such as mezzanine lenders or potentially even of a court, if the borrower has filed for bankruptcy protection) must be obtained before closing.  Any cash management agreements and arrangements must be put into place (including notifying any tenants and obtaining the consent of any third party bank to any control agreement providing the lender with control over borrower’s bank accounts for the property).

Conclusion and caveat.  It is very important for a lender contemplating a workout to do its homework:  it must bring in new counsel and, with that counsel, analyze its business and legal position.  A lender needs to understand what it would reasonably expect to collect in a foreclosure (and/or borrower bankruptcy) as compared to what it would reasonably expect to collect through a workout.  To avoid increasing its potential liability, the lender must carefully document any actions it takes. 

Once its analysis is complete,  a lender needs to decide if a workout is feasible.  If the lender moves forward to negotiate and document a workout agreement, it must make sure that all necessary loose ends are tied up:  that all needed corrections to loan documents are made, that any needed consents are obtained in writing, that any filings are completed. 

The workout may provide the last best hope for a consensual resolution.  If it does not work, the lender will probably face litigation and much higher costs in order to collect on its loan.

One caveat: this series of blog entries provides an overview of the mindset and key issues and tasks that must be handled by a lender and a borrower in doing a workout.  However, every lender has different internal and external priorities.  In addition, every project and borrower present their own challenges.  For that reason, please note that this is a general guide, but not an exhaustive one.  A summary as short as this one cannot take the place of a full review of a specific loan and project done by competent businesspeople and local counsel.

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1 Response to “Workouts 101, Part 6: Lenders’ Negotiations and Documentation”


  1. 1 Dan Sanders September 1, 2009 at 1:16 am

    Your workout guideline briefs are just what the doctor ordered. It’s been a bit since dealing with lender workout and construction advances.


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Attorney Advertising. This blog is a periodical publication of Maura O'Connor, a partner of Seyfarth Shaw LLP and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. You are urged to consult a lawyer concerning any specific legal questions you may have. The contents are intended for general information purposes only and represent the individual views of Maura O'Connor only. Any tax information or advice contained herein is not intended to be and cannot be used by any taxpayer to avoid tax penalties that may be imposed on the taxpayer.

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