When a borrower defaults, a forbearance agreement documents the lender’s agreement not to exercise remedies for a period.
What the lender obtains. Acknowledgement of the debt, the defaults and the enforceability of the loan documents; a release of lender liability claims; confirmation of liens and guaranties; and a waiver of defences. These acknowledgements are the principal value of the agreement.
Conditions. A milestone schedule — appointment of a financial adviser, delivery of a business plan, a refinancing or sale process with dates, asset dispositions, additional reporting.
Additional protection. Increased pricing, additional collateral, springing control agreements, a lockbox, a budget with variance covenants, and sometimes a pre-negotiated consent to receivership or a confessed judgment where lawful.
Termination events drafted so that any breach ends the forbearance immediately without further notice.
For the borrower. The value is time and the avoidance of acceleration. The cost is the release and the acknowledgements, which eliminate leverage later. Borrowers should negotiate the milestone dates realistically, because a schedule that cannot be met simply relocates the default.
Lender liability. The release protects against claims of bad faith, overreaching and control. Those claims are hard to win, and a lender that has exercised operational control over a borrower is more exposed than one that has enforced its documents.