One of the greatest challenges and opportunities presented by the COVID pandemic is how businesses, large and small, can handle ongoing contractual commitments when the business climate has changed. There are a myriad of types of commitments affected, including debt obligations, real estate leases, supply contracts, and product delivery agreements. As many businesses deal with changing dynamics and the need to reposition their approaches, these commitments are becoming increasingly problematic in this uncertain economic environment.
A well-considered strategy is one taking into account not just the business environment and the terms of the legal obligations, but also the position of the party on the other side of the table. Most of these issues involve a shared problem, where your position and the position of the other side need to be considered. For example, as a tenant you might not be able to pay your rent, but this also can create problems with landlords and their lenders.
The best solution when you are maintaining an ongoing relationship following the renegotiation is to develop rational and sustainable solutions appealing to all sides with minimal business interruption and minimized costs. If possible, your relationship with the other side should survive the restructuring.
A renegotiation of an obligation should not be perceived as a show of weakness, but just a necessary process when operating a business in uncertain times.
A few pointers to consider:
- Review your Agreement. The place to start is reviewing your agreement and consider how it can support what you want to accomplish.
- Have a solid narrative warranting the renegotiation. You should be clear as to why you want to renegotiate and why the other side should consider your suggestion. Simply saying times are tough may not be good enough.
- Your target renegotiated amount should be realistic and data-driven. You may want to negotiate only a 5% haircut on your obligation, or maybe 50%. Whatever the amount is, it should not be arbitrary. Try to tie it to a metric and make that clear to the other side.
- Consider offering something in exchange. For a negotiation to succeed, the outcome should be a win-win – giving you something you want while also allowing the other side to walk away happy. Money may not be your only bargaining chip, and sometimes, other quid pro quos, such as extending a payment deadline, or say, shaving down your lease space, may be more practical and achievable for your counterparty.
- Make sure the final negotiated agreement is confirmed in writing. The final understanding should be memorialized and legally binding.
We focus on helping firms restructure all types of contractual obligations. Our general strategy is to avoid the time and cost of formal dispute resolution, such as arbitration or litigation, and work in a pragmatic result-oriented manner. Whether obligations are wholly within the United States or with or between foreign counterparties, we work with an eye to results that represent the best resolution for all parties so that relationships can remain intact and that solutions serve clients for years to come. Our emphasis is on loss reduction and business continuity. Additionally, we can advise on preventative measures aimed at minimizing loss in future force majeure events.
Recently, a foreign-based client approached our firm regarding an account receivable it had from a large U.S. company. The debtor, a much larger global business, tried various delaying tactics to dissuade the client from pursuing the debt. By targeting the right personnel within the company’s structure and maintaining a fact-based approach ground on legal contract and reasonableness, we were able to secure the exact amount sought by the client at a reasonable cost without having to go to court.
Our restructuring practice is led by Michael Lyon, with deep restructuring, financial, and international experience. He served as Special Assistant to Chairman William Seidman at the FDIC and RTC during the Savings and Loan (S&L) Crisis, and then as General Counsel for one of the United States’s largest workout companies, managing billions of dollars of troubled debt. He also managed the debt restructuring for private clients involving dozens of restructurings and a billion dollars of obligations.
We will be happy to discuss your needs and help work to find you solutions.
For more information, contact Farhad Alavi at [email protected] or 202.686.4859 or Michael Lyon at [email protected] or 202.461.1565. This Client Alert is intended solely for informational purposes and should in no way be construed as legal advice. Every case varies and no outcomes described here is necessarily indicative of future results, and Akrivis in no way guarantees any outcomes. If you have any questions or are unclear on any of the subject matters addressed or discussed on this Client Alert, please consult a licensed legal professional.