With the increasing number of commercial real estate loans in default, in many instances, the best exit strategy for a lender is to grant a defaulting borrower more time to work with the property to attempt to secure more leases, sell the property or find another lender or partner to provide financing and satisfy the defaulting loan. This is especially the case when the borrower is a reputable and qualified real estate developer and has a strong management and leasing team. In such a situation, the lender and the borrower should enter into a forbearance agreement, which grants the borrower an extension of time to cure any defaults and preserves the lender's rights and remedies under the loan documents.
A forbearance agreement is an agreement between a lender and a borrower that obligates the lender to refrain from pursuing remedies for existing defaults under a loan for a certain period of time (called the "forbearance period") in consideration for certain obligations by the borrower. During the forbearance period, the borrower is obligated to attempt to cure any existing defaults, satisfy other conditions to improve the performance of the secured asset and, in some instances, sell the asset or secure a new loan or other financing so that the existing loan can be satisfied. Forbearance agreements can also include certain modifications to the loan changing the monthly payments, changing the interest rate, and providing for certain fees to be paid to the lender.
A lender may attempt to have the borrower acknowledge certain facts related to the loan in a forbearance agreement, including the outstanding balance of the loan, specific defaults under the loan that have occurred, and that the representations and warranties that were made in the original loan agreements remain true and correct. In addition, a lender may attempt to cause the borrower to waive all defenses and claims (including lender liability claims) that the borrower may have against the lender, as well as release the lender from all liability that the lender may have to the borrower related to the loan.
As a borrower, it is important to try to restructure the loan to include terms that are more manageable in light of the income from the property and the current economy, while still providing an acceptable debt service and an acceptable rate of return to the lender. Also, it is important to limit the waivers of defenses and the release of the lender's liability as much as possible so as to protect any claims that the borrower might have in the future.
