Not all loan defaults result in contentious interactions between the lender and the obligors on a commercial loan. In some situations, obligors are motivated to work with the lender to liquidate business assets resulting in a higher recovery to assist with the pay down of the loan. That can be a mutually beneficial relationship for all parties involved.
In those situations where obligors on the loan are working with the lender, they may volunteer to surrender the collateral securing the loan to the lender rather than forcing the lender to engage in legal action to gain possession of the collateral. This most often occurs with the equipment, inventory and other assets of a shuttered business. In such cases a lender may want to use a voluntary surrender agreement to: (i) memorialize the terms of the surrender, (ii) protect the lender throughout the process, and (iii) assist both parties with a clear understanding of how the surrender of the collateral and subsequent sale will occur.
A voluntary surrender agreement is essentially an agreement that obligors and a lender enter into at the time that the obligors are surrendering the collateral of the business to the lender. While it is not necessary to take possession of collateral, in some situations, it can be helpful where the parties are agreeable to executing this type of agreement.
A voluntary surrender agreement will often outline the loan details, the collateral for the loan and provide the current balance due on the loan(s). In addition to setting forth the background of the loan, there are other provisions that a lender may want to consider including in a voluntary surrender agreement that protect the lender. Some of those provisions can include: obligors’ admissions of default under the loan documents, reaffirmation that the loan documents are in full force and effect, waiver of defenses to the enforcement of the loan documents, release of the lender by obligors, and waiver of jury trial.
Lenders may also want to include provisions that directly address the mechanics of the surrender. Specifically, how the collateral will be turned over, whether the collateral will be left at the current location or moved to another location for sale, waiver of notice requirements prior to a collateral sale, warrants and representations by obligors that there are no other liens against the collateral, who will cover the costs of the surrender/sale, and, provisions by which obligors agree to execute any and all documents necessary to effectuate the transfer of the collateral to the lender and/or a third party to avoid issues with the transfer of title to the collateral.
If the voluntary surrender agreement is drafted to include protective provisions as well as releases, it can provide beneficial protection for the lender while assisting with a transition of the collateral from the obligors to a purchaser for value. Lenders should consider utilizing voluntary surrender agreements in situations where obligors are offering to assist with the wind down and liquidation of a business.
For more information concerning loan workouts, servicing, litigation, and creditor’s rights, please contact us at 215.542.7070 or visit our website at www.starfieldsmith.com.