Prepare to Work Out

A plan strengthens your position in contract renegotiations.

In the past two years, many businesses and individuals have sought relief from contract obligations entered into during better times. They have received much advice on how to proceed to work out their difficulties.

To those of you on the other side — this article is for you.

Whether you are a landlord approached by a tenant, a seller by a buyer, or a banker by a borrower, you have an agreement with someone who can’t fulfill the necessary obligations. Now you need a plan.

Read Your Contract

When asked to renegotiate the terms of an existing contract, consider your plan of action before you launch into detailed discussions. Your first step is to read the existing agreement to ensure you understand its basic terms. Don’t rely on abstracts or summaries: Read the original contract, any amendments, and related correspondence. Flag any provisions that might need to be discussed.

In reading these documents, identify provisions you may want to revisit, especially those you conceded in the original negotiations. In this new environment, you may want to recapture the advantage as consideration for any new concessions you are asked to make. Or these may be provisions that, in hindsight, you realize are inadequate or missing.

The next step — too often neglected — is to enter into a pre-workout agreement that outlines how negotiations will proceed and conclude. If you rush into discussions without a written understanding as to when your negotiations result in a binding agreement, you risk that preliminary term sheets and correspondence, including e-mail exchanges, may be enough to establish an agreement you did not intend.

The Pre-Workout Plan

A carefully drafted pre-workout agreement lets you discuss changes to your existing arrangement while minimizing the chances of making premature claims. It also gives you the opportunity to improve your position in the negotiations. A pre-workout agreement may contain the following provisions.

Immediate correction of certain deficiencies. Before your first meeting with the other party, you may want to require delivery of current financial statements and proper certificates of insurance and payment of property taxes and/or common area or operating expenses if due. The other party’s satisfaction of such preliminary requirements is a condition precedent to further discussion.

No amendment until a definitive agreement is signed. Even if your agreement states that it only can be modified in writing, your pre-workout agreement should state that no term sheets, correspondence — including e-mail exchanges — nor any discussions or negotiations will bind you until a final, definitive agreement is executed by you, and perhaps approved by a superior such as a designated executive of your company or by your board of directors. Depending on the nature of the original transaction, the definitive agreement may take the form of a duly executed loan modification, lease amendment, change order, or amendment to purchase agreement.

Negate admissions. If any litigation has been filed or threatened, your pre-workout agreement may need to state that all discussions are settlement negotiations and are not admissible as evidence in any judicial or alternative dispute resolution proceedings, and that nothing may be construed as an admission by you.

No waiver of rights. The pre-workout agreement may state that negotiations and discussions do not constitute a waiver of existing defaults or your rights and remedies under the existing agreement. It also may confirm that any default notices previously sent remain in effect and that any discussions or negotiations do not suspend or extend any notice, grace, or cure periods. Alternatively, you may want to suspend such matters, but provide that any suspension will be lifted automatically upon termination of negotiations.

Right to terminate negotiations. You may want the right to end negotiations at any time by sending the other party written notice. Alternatively, you may want to specify a specific minimum or maximum duration for negotiations.

Costs . Depending on what your existing agreement says, you may want to confirm, or provide for, reimbursement of your expenses, such as your legal counsel fees or other professional fees. You may want to require a deposit to cover such expenses. If you do not have a right to reimbursement of such costs under your existing agreement, and you are unable to insist on reimbursement as a prerequisite to further discussions, you may want to state that each party shall bear its own expenses incurred in the negotiations.

Ratification of agreement and estoppels. The pre-workout agreement may offer a chance to avoid potential claims and problems. Accordingly, your pre-workout agreement may address these concerns.

Precisely identify the existing agreement, including any amendments and side agreements. This can be useful especially if your record keeping has been less than perfect, or if you obtained an existing agreement by assignment from another party.

In addition, have the other party:
• ratify and confirm the existing agreement as valid, continuing and in full force and effect in accordance with its current terms;
• stipulate that you have performed all of your obligations under the existing agreement required to be performed by you to date, that you are not in default, and that it has no claims against you;
• confirm that it has no offsets, abatement rights, or other defenses to its obligations under the existing agreement, or if it has any, have it list them. If any are listed, you may need to negate that you admit to or accept any such listed matters and that you reserve your right to dispute them.

There are, of course, other provisions that you may want to consider in any well-drafted pre-workout agreement depending on the nature of your existing agreement, your particular situation, and the parties involved. The key is to think through the process, prepare thoroughly, and while the other party remains cooperative and eager to talk, establish a framework that enables you to proceed with negotiations under conditions that are not only prudent but also favorable to you.


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