Forbearance Agreement
(Commercial Real Estate Loan)

Summary

This template is a forbearance agreement that can be used in connection with a commercial real estate loan, where the borrower has defaulted on the loan and the lender agrees to forbear from exercising its rights and remedies under the applicable loan documents. This template contains practical guidance, drafting notes, and optional clauses. A forbearance agreement differs from a loan modification agreement, in that the lender does not waive any applicable existing defaults. Instead, the lender merely agrees to forbear from exercising the remedies to which the lender is entitled as a result of the default. The forbearance is often called a "standstill". In an effort to improve its ability to enforce the loan documents, the lender's forbearance agreement may also require that the borrower and any guarantors make certain acknowledgments, stipulations, waivers, or releases. The borrower will argue that the forbearance agreement should not improve the lender's position and that the parties should negotiate such provisions in the actual loan modification documentation. Those types of arguments are often but not always successful. For a detailed discussion of commercial real estate loan workouts, see Workouts of Commercial Real Estate Loans. The lender should be clear that the forbearance agreement is not an amendment of the loan documents but is a one-time agreement by the lender to delay exercising its remedies. Before any workout discussions commence, the lender also should insist that the borrower and any guarantors enter into a pre-negotiation agreement. For a template of a pre-negotiation agreement, see Pre-Negotiation Agreement (Commercial Real Estate Acquisition Loan). The primary purpose of a pre-negotiation agreement is to protect the lender from claims that the parties modified the terms of the loan in any manner that the lender did not intend. Before the lender enters into a forbearance agreement, it is critical to confirm that the lender can clearly establish that (1) a default has in fact occurred and (2) such default has become an event of default under the loan documents (i.e., all required default notices (if any) have been properly given and any applicable grace or cure period (if any) has expired). Most jurisdictions do not permit a lender to foreclose, accelerate the loan balance, or exercise other comparable remedies unless the event of default is material. If the event of default in question is non-monetary or there is otherwise any doubt as to its materiality, the lender's counsel should carefully analyze applicable law to determine which remedies (if any) the lender may exercise. If the default or event of default is not material, it may be more practical for the lender to provide a waiver agreement. In a waiver agreement, the lender waives the specific default in question, and the loan is restored to its pre-default status. See Waiver (Bankruptcy, Loan and Other Debt Workouts) for a template of a waiver agreement. A waiver agreement may be appropriate if (1) an isolated, non-monetary default has occurred, (2) the same default is not likely to occur again, (3) the loan is otherwise performing, and (4) the lender has confidence in the borrower and the collateral. For a detailed discussion of forbearance agreements in commercial real estate loans, see Workouts of Commercial Real Estate Loans and Commercial Real Estate Acquisition Loan Resource Kit. For a full listing of key content on commercial mortgage foreclosures and loan modification agreements, respectively, see Commercial Foreclosure Resource Kit (National and Select States) and Commercial Real Estate Loan Modifications Resource Kit. For a full listing of key content covering acquisition financing, see Junior Associate Real Estate Resource Kit (Acquisition Finance). For a full listing of key content that provides an overview of several out-of-court restructuring options, including workouts, and liquidation alternatives to filing for bankruptcy protection, see Out-of-Court Restructuring and Liquidation Alternatives Resource Kit.