Fear, and Overcompensating for the Unknown

At the onset of the pandemic I wrote a blog about how the coronavirus almost killed a CMBS refinance I was working on at the time, which now seems like a trivial matter in light of the upheaval that has occurred around the globe.  Much of our response to the threat of infection is driven by fear (or, for some of us, lack of fear).  

Lawyers take the concept of fear to an entirely different level. In law school and in the early years of our practice we are taught to protect the client, which often leads many younger lawyers to try to draft for every possibility regardless of what the parties actually agreed upon. A good example of this was a lawyer representing a lender on a recent real estate loan involving property that had not undergone full environmental examination at the time of closing. The lender and borrower agreed to an environmental holdback of funds to be used for cleanup if needed or released to the borrower if no cleanup was needed. The rules of the game were discussed by the principals and agreed upon in a phone call. When the concept was drafted into the loan agreement, what we received was a new three-page section that expanded a relatively simple holdback arrangement into a multi-faceted set of environmental covenants that included further testing by the lender, new indemnifications, potential additional holdbacks and other matters that the parties never even discussed—all on the eve of closing.

Fear also plays a role in how lawyers respond to legal questions in areas in which they are not well versed. I had recently negotiated an inter-creditor agreement with an attorney not familiar with these types of documents nor in bankruptcy law. His lack of knowledge led him to take often unreasonable legal positions which led to delays in getting the document finalized and higher legal fees for the client.

As brokers and principals, understanding the impact of fear and managing fear in a deal negotiation can greatly reduce the chances of prolonged negotiations, undesirable deal terms, higher transaction costs and (worse yet) dead deals. Sometimes this can be mitigated with a well-drafted letter of intent but even a comprehensive LOI cannot ultimately eliminate fear in the document drafting process and may work against the goal of gaining control over the deal in the first place. The best approach is to stay involved in the negotiation and be ready to challenge the attorney that asks for something that seems unreasonable. Questions like “What are you actually worried about?” or “What is behind this change to the document” can elicit the kind of information that enables problem-solving. Unfortunately, we often take objections at face value and neglect to “drill down” to the core of the problem, thereby allowing the problem to fester. Lawyers-only calls can be helpful to hammer out legal issues, but prolonged legal negotiation is a clear signal that someone is trying to tackle that once-in-a-million problem or overcompensate for the unknown.

For more tips on navigating complex real estate negotiations, check out our “Practical Solutions” blog series.