Practice Pointer: Should Lenders Use Pre-Negotiation Agreements?
In a previous email alert, we looked at when an agreement is enforceable against a commercial lender. Some states have fraud laws that protect lenders, but not all of these fraud laws protect all lenders, and some provide more protection than others. Just as critically, many people now communicate primarily through email and other electronic media that might meet certain fraud statuses. To reduce these risks, some lenders prefer to enter into pre-negotiation agreements with their borrowers and guarantors. What are the key elements of these agreements and are they worth the cost?
Pre-negotiation agreements are particularly, but not exclusively, useful in jurisdictions that lack strict fraud laws. But pre-negotiation agreements are only worthwhile if they are enforceable, and their enforceability depends on whether the borrower receives anything in return. Many courts will apply a pre-negotiation agreement if the lender is late in exercising the remedies or if actual negotiations ensue, while some will apply it even if no delay or negotiation occurs.
The value of pre-negotiation agreements also depends on who will be communicating. If all communications go through legal counsel anyway, they are of much less value, if your sole purpose is to protect yourself from statements inadvertently forming binding agreements.
Pre-negotiation agreements offer several additional critical advantages. They encourage free negotiation between the parties by excluding discussions more widely than the Rules of Evidence. Pre-negotiation agreements generally render all communications inadmissible as evidence for any purpose, while the bar for evidentiary rules is more limited. Pre-negotiation agreements also control expectations by clarifying that agreements are not binding until they are drafted and signed by authorized representatives, and encourage cooperation by requiring the borrower to provide information. to the lender.
Some pre-negotiation agreements offer other advantages. For example, the borrower and the guarantor may recognize that the lender holds the loan, any defaults that exist, and that the lender is entitled to certain types of fees and expenses. Sometimes the borrower and the guarantor release the lender from the debts or admit that they do not have any. Pre-negotiation agreements often state that discussions may not result in an amicable resolution, and the borrower and guarantor should not forgo other opportunities in the meantime. Each of these can help avoid or quickly resolve costly fights in the future.
One of the most valuable things is the insight it gives into how the issue is going to evolve. With a few exceptions, borrowers who intend to proceed in good faith tend not to meaningfully negotiate pre-negotiation agreements. If a borrower or their legal advisor strongly rejects a pre-negotiation agreement, that alone may be all a lender needs to know.