Forbearance Agreement
(Commercial Real Estate Loan) (IL)

Summary

This template forbearance agreement can be used in connection with a commercial real estate loan secured by real property located in Illinois, where a borrower has defaulted on the loan and the lender agrees to temporarily 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 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 enforcement ability, the lender's forbearance agreement may also require that the borrower and any guarantors make certain acknowledgments, stipulations, waivers, and / or releases. The borrower will argue that the forbearance agreement should not improve the lender's position and that such provisions should be negotiated in the actual loan modification documentation. Such arguments are often 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 the exercising of its remedies. Before any workout discussions commence, the lender should insist that the borrower and any guarantors enter into a pre-negotiation agreement. For a pre-negotiation agreement template, 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 which 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). 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 waiver agreement template. 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, Commercial Real Estate Loan Defaults and Remedies (IL), and Commercial Real Estate Acquisition Loan Resource Kit (IL). If a foreclosure is necessary, Illinois is a judicial foreclosure state. While in narrow circumstances other mechanisms may be used to foreclose, judicial foreclosure is typically the most practical option. This means that to foreclose on a property without the consent of the mortgagor, a mortgagee must file and successfully prosecute a foreclosure lawsuit to judgment and, usually, judicial sale of the property. See 735 ILCS 5/15-1101 et seq., the Illinois Mortgage Foreclosure Law (the "IMFL"). For a discussion of strict foreclosures and alternatives to judicial foreclosures in Illinois, see Strict Foreclosures and Judicial Foreclosure Alternatives (IL). For further information on judicial foreclosure, see Judicial Foreclosure State Law Survey. Generally, Illinois has five mechanisms by which a mortgage or related interest on a property can be foreclosed: • Judicial foreclosure auction • Consent foreclosure • Deed in lieu of foreclosure • Short sale • Strict foreclosure Of these, most require the filing of a foreclosure lawsuit or are completed during the period that a foreclosure lawsuit is pending before the court, although that lawsuit may not reach the stage of a judgment being entered. Most foreclosure lawsuits in Illinois are disposed of either by amicable settlement between the parties or by summary judgment, and while it is possible for a foreclosure lawsuit to go to trial, this is rare. Often, in a foreclosure, there are no genuine issues of material fact, so the plaintiff need only show that it has properly complied with all procedural requirements and then file a motion for summary judgment to receive judgment. Generally, judicial foreclosure is the exclusive remedy for anyone who seeks to foreclose on a mortgage, real estate installment contract, or collateral assignment of beneficial interest made as part of a land trust, provided that the mortgage, installment contract, or land trust was made after July 1, 1987 (the effective date of the IMFL). See 735 ILCS 5/15-1106(a)(1)–(3). The IMFL has rendered power of sale provisions in mortgages or other agreements completely unenforceable (even if they are not required to be foreclosed under the IMFL's provisions). See 735 ILCS 5/15-1405. Such mortgages or agreements must be foreclosed by some form of legal proceeding or by short sale or deed in lieu of foreclosure; they cannot simply be sold pursuant to a power of sale provision to avoid having to file a foreclosure lawsuit. The IMFL specifically states that all foreclosures brought under its purview are both contractual and equitable proceedings. This means that traditional equitable defenses and remedies, including, but not limited to, capacity to contract, agency law, estoppel, fraud, misrepresentation, duress, confusion, or mistake, are considered supplementary to the IMFL. Unless the IMFL specifically says that an equitable or legal principle is unavailable or negated, then it will be available to the parties and the court and can form the basis for pleadings, motions, defenses, and rulings. See 735 ILCS 5/15-1106(e). Section 1504 of the IMFL lays out the form for a foreclosure complaint and the content it should include. 735 ILCS 5/15-1504(a). For a detailed discussion for foreclosure in Illinois, see Foreclosure Resource Kit (IL), Commercial and Residential Mortgage Foreclosure: Judgment, Sale, Possession, and Right of Redemption (IL), Commercial and Residential Mortgage Foreclosure: Preliminary Procedures and Commencement of Action (IL), and Commercial Real Estate Loan Defaults and Remedies (IL). For further information on commercial real estate financing in Illinois, see Commercial Real Estate Acquisition Loan Resource Kit (IL) and Commercial Real Estate Financing (IL). For a list of key resources covering acquisition finance-related tasks for a junior associate, see Junior Associate Real Estate Resource Kit (Acquisition Finance). For information on purchasing and selling commercial real estate in Illinois, see Purchasing and Selling Commercial Real Estate Resource Kit (IL). For a list of key resources covering real estate-related tasks for associates, in-house attorneys, and interns, see First Year Associate Resource Kit: Real Estate, Summer Associate Resource Kit: Real Estate, In-House Real Estate Resource Kit, and Federal Government Summer Intern Resource Kit: Real Estate.