The growing mountain of commercial mortgage defaults has resulted in a corresponding increase in loan workout and foreclosure activity nationwide. Since the capital markets have shown signs of a slow return to a new world of "normalcy" and foreclosure is often a worst-case scenario for lenders, the loan workout process is frequently the preferable solution for both borrowers and lenders in a defaulted loan scenario. However, before borrowers and lenders begin discussions of any kind in a work-out or loan modification proposal, it is critical for both parties to sign a Pre-Negotiation Agreement (PNA). A well-drafted PNA will confirm: (i) the rights and obligations of both lender and borrower as they relate to any proposed loan modification and/or work-out; (ii) the guidelines governing all discussions and proposals relating to such modification and/or work-out; (iii) that, although the parties agree to "talk" about working out and/or modifying the loan, there will be no change to the existing loan terms until they both agree to and sign formal loan work-out/modification documentation; (iv) that evidence of conduct and communications during the negotiations are inadmissible in any future litigation; and (v) that neither party waives any of its rights and remedies against the other in agreeing to enter into such workout/ modification discussions. Once executed, a PNA will help to facilitate open discussions and negotiations among interested parties with respect to a proposed loan modification or work-out before any modification of the loan terms is reduced to a written agreement. With a well drafted PNA, the parties will not unknowingly waive or compromise valuable rights contained in the existing loan documents. Typically, lenders will require a PNA in order to prevent any misunderstanding that they have agreed to some deal unofficially. (The concept of the PNA was developed to help do away with lender-liability suits brought by borrowers claiming that the loan officer had "promised" them loan extensions or modifications during meetings and/or phone calls. The lawsuits actually gained some traction and, at the very least, delayed foreclosures.) On the other hand, some lenders try to materially improve their positions by including in the PNA waivers of claims and defenses, full releases and similar concessions, so such agreements should always be carefully reviewed by legal counsel before they are signed. It is important for a borrower and a lender to discuss a PNA as early in the modification or work-out process as possible in order achieve a more efficient result.