Haynes and Boone's Newsroom

Waiver, Forbearance Agreements After Default
Scott G. Night, Craig S. Unterberg

If the current economic downturn continues, the number of borrowers that default under debt agreements will increase significantly. A previously prized borrower that once could dictate terms to its lender likely will find itself with fewer options when facing a default and will be forced to work with its existing lender to obtain either a waiver or a forbearance agreement.

Waiver and forbearance agreements contain many similar provisions, and they both provide a certain amount of relief for the borrower. One significant legal difference: A forbearance agreement will not eliminate the default. To the contrary, a forbearance agreement expressly preserves the default, and the lender only agrees to refrain from exercising its remedies during the forbearance period. A waiver agreement, on the other hand, waives the default and restores the parties to their pre-default positions.

Advising clients facing a default requires an understanding of the following: the different legal issues parties should consider in determining if a waiver or a forbearance agreement is appropriate, actions a lender should consider to bolster its position on a post-default basis, and provisions parties may consider in drafting and negotiating a waiver or a forbearance agreement.

This article outlines steps to be considered when advising a client facing a default.

Article excerpted from Texas Lawyer. For the complete article click here.