Did I sign my life away? That is a question voiced all too frequently these days by business and commercial property owners in their dealings with banks and lenders.
The answer may be a surprise. In many cases, no matter how dire the financial circumstances and how ironclad the loan documents may appear, the law may provide a solid lifeline.
The economic downturn has placed tremendous pressure on financing relationships; the values of commercial properties have decreased and the ability of businesses to generate revenues to service debt has declined. Once promising ventures have been turned upside down. The terms of financing that were once feasible may now be impossible. This means that your bank or lender may literally hold the life of your business in its hand.
Loan documents are generally unforgiving. They usually contain decisive default provisions and significant consequences flowing from any default. Penalties are often harsh. They may include foreclosure on property, actions to recover unpaid sums, execution on collateral and appointment of a receiver. Loan agreements usually impose significant interest penalties for failure to pay, and provide for recovery of attorneys fees and costs associated with enforcement. Often the penalties overtake the underlying debt.
In distress situations, lenders will insist that borrowers sign forbearance agreements before even agreeing to discuss possible workouts. These agreements typically include broad general releases of any claims the borrower may have against the lender for acting in bad faith, misrepresenting facts or circumstances relating to the loan, predatory lending practices or unfair trade practices. This adds yet another layer of legal protection for banks.
Do not lose hope.
There is a simple proposition in the law that a bank or mortgage lender owes to its customers an obligation of good faith and fair dealing. That means that a bank should not be permitted to call a loan, or otherwise change its terms, simply because the bank’s own business fortunes have changed and it wants to clean up its own balance sheet.
This is particularly applicable in today’s business climate in which the banks hold such a position of power over the fortunes of so many businesses and jobs. It is precisely because of this inequality of power between lender and borrower that courts may not enforce forbearance agreements that are obtained as an ultimatum for even discussing the possibility of reworking the terms of a loan.
Take, for example, the property developer who began a commercial development when the market was strong but now finds itself having financed a project that can no longer sustain the debt service in the current market. If the lender promised to extend the loan maturity date or to lower the interest rate, but changes its position along the way, that may constitute a bad faith business practice and provide relief for the property owner.
Consider loans that are packaged and sold to another lending institution. If the new parties controlling the loan change their standards for declaring defaults or filing for foreclosure, those actions may give rise to claims against the lender. Perhaps the lender has received funds from the Troubled Asset Relief Program (TARP), but has failed to pass those benefits onto the business owner. That may constitute an equitable defense to foreclosure or other efforts to enforce the terms of the loan.
Similarly, if there is no compelling reason, such as mismanagement or theft, to have a receiver appointed to take control of a distressed commercial property or business, voluntary escrow accounts can be set up to secure the disputed funds, while continuing to give the property or business owner the ability to run the day-to-day operations. After all, changing management to a person unfamiliar with the property or business, and upsetting relationships with customers or tenants, may cause more harm than good.
Breathing freely under the weight of loan documents and the economic times may be challenging. But business and property owners should force themselves to take a deep breath. The law provides remedies to keep businesses afloat for the time it may take to work out more favorable loan terms with their lenders and for economic circumstances to improve.
Have you signed your life away? You may be delighted to learn that your life is still your own.
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Attorney David A. Slossberg is a partner at the Milford-based law firm, Hurwitz, Sagarin, Slossberg & Knuff, LLC. Reach him through the firm’s website at www.hssklaw.com.
