When loans, leases, or other legal relationships start to go into default, the first instinct is often to try to solve the problem. That can lead to conversations with the other side, emailing back and forth, proposals, and sometimes discussing changes in the deal that might satisfy both parties.
It’s not necessarily a good idea, though, for all of that to happen right away. Careful negotiators prevent trouble by insisting on signing a prenegotiation agreement before they open their mouths or press send on the first sensitive email.
In an era when most communications happen over email—conversations that usually aren’t reviewed by lawyers—it’s easy to fall into a trap and incur liability. Prenegotiation agreements exist to prevent that.
For example, a court might interpret enthusiastic emails or text messages as agreement. The people who write those communications might assume such things don’t have legal significance and are just transient chit-chat. They’re wrong. Courts have no problem finding that email or text messages are just as binding as formal written and signed contracts if they state the essence of a deal.
One party or the other might also use the back-and-forth of negotiations as the basis for claims of bad faith, fraud, misrepresentation, or other trickery. Lenders in particular worry about claims of “lender liability” if a court decides that the lender somehow misbehaved in its communications with the borrower.
Some of the email traffic, text messages, and conversation notes might not look very good at all if a court ever saw them. The mere existence of communications between the parties may allow one party or the other to raise claims in later litigation, whether or not those claims have any real basis. Regardless, they will take time to resolve.
In their negotiations, even if the parties have agreed to some parts of a resolution, they might not want to be bound by those tentative agreements until the parties have worked everything out.
The appropriate protective measure to prevent all this—a prenegotiation agreement—can be very simple and short. It just needs to say the parties intend to discuss certain matters, and none of those discussions will be legally binding or admissible in court. The parties won’t be bound at all unless and until they’ve agreed on, negotiated, and signed settlement documents. A prenegotiation agreement might also refer to the state or federal rules that govern litigation and settlement discussions.
Anyone entering into negotiations will want to ensure that everyone involved in the process joins in the prenegotiation agreement. For example, most loans have guarantors. If the lender starts a conversation with the borrower, the lender will usually also want the guarantors to join in the prenegotiation agreement.
Prenegotiation agreements work best if they stop there. Less is more.
The party in default might want the other party to agree to negotiate in good faith—a booby trap that the latter party will typically reject. The party in default might ask the other party to agree to hold off on taking any enforcement action (eviction, foreclosure, etc.) while the parties talk. That will sometimes make sense, but probably not for very long.
The party that’s not in default—in the world of real estate, that usually means a lender or landlord—might try to use a prenegotiation agreement to help speed up and ease any future litigation. For example, the landlord or lender might ask the tenant or borrower to acknowledge that the governing documents are in full force and effect and haven’t been amended or waived.
The landlord or lender might even go a step further and ask the tenant or borrower to admit that certain defaults have occurred and to waive any claims.
A tenant or borrower typically won’t agree to any of that, because a prenegotiation agreement is supposed to prevent either party from worsening its position as a result of opening a noncommittal dialogue about a problem.
In an era when most communications happen over email, it’s easy to fall into a trap and incur unintended liability when negotiating a workout."
On the other hand, if the lender or landlord is already accommodating the borrower or tenant in some way, it might be reasonable to expect some accommodation in return.
And if the default is obvious and easily proven, such as failure to pay three months of rent with no plausible excuse, the defaulting party might be more willing to admit the default, especially if it is the price of having a conversation.
A careful prenegotiation agreement will often carve out some exceptions.
For example, suppose the parties will negotiate overvaluation or whether certain events occurred. One of the parties might present objective appraisals or other factual evidence to try to convince the other party of its position. Those presentations shouldn’t be off-limits in any future litigation.
If negotiations break down, one of the parties, or maybe both, will want to have the right to end the prenegotiation agreement and the cloak of invisibility it throws around the parties’ negotiations. A prenegotiation agreement will often have an outside date and give each party the right to prematurely terminate discussions if they reach an impasse.
It may go without saying, but both parties will usually want the other party to keep their negotiations confidential. It’s a reasonable ask, but can bring into the discussion dozens of mostly bogus issues that can arise in any confidentiality agreement.
With that in mind, it’s usually best to say in a prenegotiation agreement that the parties will preserve the confidentiality of the discussions in a prenegotiation agreement, even if talks fail, and stop there. But one party or the other may need the ability to share that information, such as with a prospective loan purchaser.
In a prenegotiation agreement for a loan, the lender will sometimes ask the borrower to agree to pay the lender’s legal fees, perhaps backed by an escrow deposit to cover those fees as billed. The lender doesn’t want to wait to see if the borrower will decide to pay as agreed.
While the parties negotiate, will the tenant or borrower continue to make full or partial payments? Governing law may attach consequences to those payments.
For example, if a lender accepts regular monthly payments, that might vitiate any notice of default the lender sent, again depending on the governing law. The lender might be able to prevent that sort of problem by including appropriate language in the prenegotiation agreement.
The simpler the prenegotiation agreement, the faster the parties can negotiate and sign it. That way, they can turn their attention to negotiating a solution to their shared problem without fear of getting sued for things they say or do in their negotiations.
Joshua Stein (www.joshuastein.com) is the sole principal of Joshua Stein PLLC, a commercial real estate law firm in Midtown Manhattan. He recently published the 3-volume New Guide to Ground Leases. For information, visit www.groundleasebook.com. He has also written a half dozen other books and 400+ articles on commercial real estate law and practice. His name regularly appears on short lists of leading global real estate lawyers.
