Buying Time for Your Business with Standstill Agreements
Standstill Agreements are a little known legal tool that could literally save your business, or someone else’s, during the current crisis. At its most basic, a Standstill Agreement puts a temporary "freeze" on a commercial relationship in light of the COVID-19 crisis. Let’s look at a couple of examples:
Your company owes a major supplier, but due to the crisis you simply cannot pay them. You want to preserve the relationship, but other bills are piling up. The shut down is slowly lifting, and if you can just buy a little more time you believe you can plow your way through the crisis and make the payments. But if your supplier sues you it will hurt your credit rating, cost you thousands in attorneys’ fees and potentially drive you to bankruptcy. In other words, a death spiral.
A commercial tenant is behind on its rent to you, but cannot pay you due to the shutdown. It’s a faithful tenant, that has been with you for years, and you know they are hurting. You want to help, and you want to preserve the relationship for better days, but at the same time your bills are piling up and your co-owners are concerned that you are “letting the non-payer off the hook”.
In both cases, a Standstill Agreement could keep your businesses out of Court, save a fortune in attorneys’ fees, buy you time and preserve your relationship. The Agreement can say whatever both sides agree to, but it would TYPICALLY say:
That the creditor agrees not to take legal action against the debtor company for some period of time.
That the debtor agrees not to sell off assets or make any changes in ownership of the business until the debt is paid.
That the debtor agrees to make some lesser payment for some period of time.
Think outside of the box for other options that could make the Agreement favorable for both sides. For instance, the creditor could agree to support the debtor’s efforts to pay off other debts by providing good reviews to rating services. The tenant could agree to repay the landlord by agreeing to increase the lease term or make higher payments after they have stabilized. A debtor could agree to make the creditor their sole supplier once they again become profitable. The creditor could insist on a personal guaranty in return for a Standstill. Or the debtor could even offer some ownership interest to the creditor. The possibilities are endless.
If the Standstill works, and if debtor makes it through the shut down it will in part be due to your willingness to think out of the box and come up with an alternative to further burying them with a lawsuit. The debtor won’t forget what you’ve done, and you will have probably have cemented your relationship with them for life.
The Business Law Section of the American Bar Association have developed a model Standstill Agreement that you can use as a guide. You can find it here. It was developed by Temple University’s Beasley School of Law professor Jonathan C. Lipson and Young Conaway Stargatt & Taylor LLP partner Norman M. Powell. Use it as a starting point.
Standstill Agreements are not appropriate or right for every case. The stakes may be too high. Or the debtor may be attempting to use the crisis to his advantage by not paying. Or you may simply have no interest in attempting to “work it out”. Sometimes lawsuits have to be brought. But keep Standstill Agreement in mind as you continue to push through this crisis. Call us if we can help.