In Part I of this blog post, we discussed the varied interests of the landlord and the tenant's lender in the tenant’s personal property located at the premises in the context of a commercial lease. Part II below will discuss suggested compromise solutions and a typical landlord waiver. Note that the article that is the basis for this post first appeared in the December, 2012 issue of Commercial Leasing Law & Strategy.
Landlord Waiver Agreement in Favor of Tenant’s Lender
As noted above, the tenant’s lenders will also want a security interest in the tenant’s personal property to secure the repayment of the tenant’s loan obligations, creating a conflict between the lien rights of the landlord and the lender. Because of this conflict, as a condition to the financing, a lender will typically request that the landlord execute a waiver of its security interest. Landlords may push back at this request, but will often to agree to at least subordinate their landlord’s lien rights to that of the lender’s security interest. The landlords recognize that financing is a critical need for their tenants, without which the tenant would not be able to operate its business and generate the revenues needed to pay the rent, so they typically agree to the waiver or the subordination of their lien rights for larger, creditworthy tenants. The landlord would obviously prefer the subordination over the waiver, as a secondary secured position could at least provide some limited recovery in a default situation. In any event, landlords would be wise to pay close attention to the form landlord waiver presented by the lender, as such forms often grant lender’s favorable rights with regard to the leased premises and place burdensome obligations on the landlord. The tenant is not typically a key party in the negotiation of the landlord waiver, as their main role is to serve as referee between their landlord and lender. However, the sophisticated tenant would be wise to include the form of their lender’s required waiver form as an exhibit to their lease agreement, to save time and expense later. Note that the landlord could likely pass its legal fees incurred in negotiation the landlord waiver onto its tenant. Five key landlord-friendly points that should be addressed in the landlord waiver/subordination document are set forth below.
First, the landlord should try to subordinate its landlord’s lien instead of an outright waiver. The true value of a secondary position may be questionable, but there could be some recovery and it is better for the landlord to be a secured creditor in the event of a bankruptcy.
Second, the landlord should try to retain control over the process of the lender removing the collateral. For example, the lender should only remove the collateral after business hours and from designated loading areas. The lender should also agree to pay for any damage caused by the removal, and indemnify landlord in case of third party claims resulting from the lender’s entry into the premises for such purposes. The landlord could also insist that the lender furnish evidence of insurance before entering onto the premises to remove the collateral.
Third, the parties need to make clear what equipment is part of the collateral. The landlord should agree that personal property remains personalty (and not part of the real estate) in exchange for the lender agreeing not to pursue its security interest against building systems such as plumbing and HVAC or other fixtures. The landlord could violate the terms of its own mortgage were it to waive its interest in these items. Further, the landlord will want to make sure that the tenant’s leasehold interest in the premises is not part of the collateral. Lease provisions dealing with the assignment of the lease by the tenant are typically very landlord-friendly and the landlord does not want the tenant to an “end run” around those provisions by including the lease itself as part of the collateral package consented to by the landlord in the waiver/subordination document.
Fourth, the lender will want notice of tenant’s default under the lease and an opportunity to cure on behalf of the tenant. This presents an administrative burden for the landlord, so the number and cause of notices should be limited, if possible, to notices which may result in a termination of the lease. With respect to giving the lender an opportunity to cure tenant’s default, the time period should be short and limited only to monetary defaults.
Fifth, the lender will request a period of time following the termination of the lease (perhaps up to sixty or ninety days) to take inventory and remove the collateral. Such a request by the lender may not be unreasonable, but the landlord should insist that the lender pay the amount which would otherwise be payable as rent under the lease during such period.
Subject to the terms of their lease agreements and the applicable state law, there are many kinds of lien rights available to landlords in the personal property of their tenants. Landlords would be wise to learn the lien laws of their respective states and draft their leases accordingly. At the same time, lenders for the tenants will object to these broad landlord’s liens as they will look to secure their loans against the same personal property. The resulting conflict is best resolved through a fair subordination of landlord’s lien agreement, which to save time, expense and aggravation later should be attached to the lease as a pre-approved form.