In the current economic climate, lenders continue to face the Hobson’s Choice of how to respond to once-reliable borrowers who are now showing signs of distress. For example, when a borrower fails to make a monthly interest payment, or fails to adhere to other requirements under a loan agreement, a lender has the option of noticing a default, which, if uncured, allows the lender either to accelerate the loan at issue or foreclose on the underlying collateral (e.g., typically, the property in a real estate lending context). However, if, as is often the case, the loan is non-recourse (except for “bad act” carveouts), or if the property has significantly diminished in value since the execution of the loan documents, a lender might opt to accommodate a delinquent borrower rather than pursuing foreclosure. Lenders who pursue this strategy, however, must be cautious.
Indeed, under recent case law, a lender who defers acceleration or other enforcement rights upon the occurrence of an “event of default” might be deemed to have modified or waived certain rights under the original loan documents at issue, even if these underlying documents contain “no waiver” or “no oral modification” provisions. However, recent cases demonstrate that lenders can protect their rights while accommodating distressed borrowers by properly notifying these borrowers that the terms of the original loan documents remain in effect.
