In our new COVID world, many leases are being restructured. Some are in response to tenant defaults and are appropriately considered lease “work-outs”. Many others will likely need to be amended to adjust to a post-COVID environment to account for changes in economics and/or space requirements, new health protocols, changed interactions with other tenants, revised parking and other services, etc. If you are considering a lease restructuring, one step that is important to consider, but which is often overlooked (at least at the beginning of negotiations) is the use of a prenegotiation agreement. Such an agreement is similar to agreements that lenders often require before negotiating loan work-outs. A prenegotiation agreement can be a valuable tool to set the expectations of all parties at the outset of negotiations and can allow for more open and productive negotiations.
A prenegotiation agreement often takes the form of a letter agreement from the party seeking the agreement and is countersigned by the other party or parties. Typically, the agreement will confirm the context in which the negotiations are occurring, the current status of the lease documents and the ability of the parties to discontinue negotiations prior to final agreement without incurring liability or being estopped from enforcing the terms of the current Lease. Here are some terms to be considered in a lease prenegotiation agreement—others may be important to consider, as well, depending on the situation:
- Is the restructure request due to COVID or another specific event?
- Who requested the restructure or renegotiation? What is being sought?
- Have some discussions predated the date of the prenegotiation agreement?
Recite Current Lease Documents
- Include Guaranties/Indemnities by tenant and landlord parties
- Include Guaranty Agreements by third parties—lease guarantors should be parties to the agreement
- Consider whether lenders to the parties should be included, especially if certain documents involving the lenders (SNDAs for example) require it or may be affected by the lease changes
Confirm What the Discussions Are and What They Are Not
- The discussions are voluntary in nature and may be terminated at any time with or without cause or prior notice and without liability of any kind
- Discussions do not constitute waivers or rights in current documents
- Any binding agreement must be contained in a formal written agreement signed by all parties
- Current term, lease payment amounts, etc.
- No outstanding obligations or defaults by any party (or recite them, if any)
- All lease documents remain in full force and effect without change unless and until modified by appropriate instruments
Address Confidentiality Concerns
- Nondisclosure of terms being discussed, whether or not actually agreed upon
- Since landlord (and possibly tenant also) may not want other tenants or others to be aware of the negotiations for a possible lease restructure, nondisclosure of the mere existence of discussions
- Nondisclosure of financial information being shared
- If litigation is involved, recite whether the discussions constitute inadmissible settlement negotiations
- If a default exists or arises during the negotiations, address whether the parties can exercise remedies during the conduct of the negotiations
- Address the responsibility for payment of costs involved in the negotiations
A prenegotiation agreement in advance of lease restructuring discussions can be very helpful if it sets the expectations of the parties and allows the parties to negotiate in an open manner. When in doubt as to whether it can be useful, try it. It doesn’t need to be complex or overly detailed in order to serve as a productive first step.