Forbearance Agreements for Landlords

We can learn a lesson from the banks.

When a commercial loan borrower defaults, the lender will often work with the borrower to get caught up on their payments or sometimes even modify the loan. There is a “price tag,” however. It is called the Forbearance Agreement.

As a condition of not declaring a full default and foreclosing or filing a lawsuit, the lender requires the borrower to sign a Forbearance Agreement. Typically, the borrower waives all prior and current claims against the lender, agrees to some additional responsibilities, and pays a forbearance fee. Landlords should adopt a similar practice.

If a tenant is in default and facing termination of its lease rights, you might want to work with it to fix the problem. It might be more advantageous than evicting at that point.  You should develop a forbearance agreement for the tenant’s signature when this happens, though. A good landlord/tenant forbearance agreement will contain the following elements, at least:

  1. Recognition by tenant that it is in default.
  2. Waiver of any current or prior claims against the landlord. As a result, if the relationship does end in a lawsuit and mutual recriminations, the tenant cannot complain about anything that happened before the forbearance agreement.
  3. Clear statement of what the tenant will do to cure the default, and the time limit. The agreement should say that “time is of the essence.” This makes all time limits firm, with no grace periods or “reasonable times” to do things.
  4. A statement that the time given to tenant to cure merely stops any default clocks, it does not restart them. In other words, suppose a tenant is in rent default. You’ve issued your 7-day notice of default and opportunity to cure. On Day Five, the tenant signs a forbearance agreement that, among other things, requires the current month’s rent to be paid on the 15th of the month. If he defaults and does not pay on the 15th, then the default clock starts ticking again, and he has only 2 more days before you will be able to file your eviction lawsuit. He does not get another 7 day notice at that point.
  5. Some change in the terms of the lease to make future default less likely, or the consequences of default more strict. For example, if the normal grace period for timely rent payment is 5 days,  you might shorten that to 2 days. You might require certified funds or credit/debit card payments, but no checks. You might require a guarantor, or a security interest in a vehicle or other type of non-household goods. You might require one or more months of prepaid rent.
  6. If the default involves behavior rather than rent (such as having a pet even though not allowed) then you might add a frequent inspection schedule for a number of months, with the tenant paying an inspection fee each time as additional rent.
  7. You might increase the rent for the remainder of the lease term because of the additional risks, or you might shorten the lease term so you can obtain a better tenant.
  8. A forbearance fee. You will usually need an attorney to help you draft the forbearance agreement. Even if you have a good form, you will have to spend time customizing it. The tenant should pay for that.

Let me know if you like this idea, or if you are already using it.