Why You Shouldn’t Waive the Landlord’s Waiver
Although seemingly a relatively straightforward document, Landlord’s Waivers (sometimes referred to as Landlord’s Agreements, Lessor’s Agreements, Landlord’s Consents, Landlord’s Certificates, etc., generally referred to as a “Landlord’s Waiver” herein) are often a thorn in the side of commercial loan transactions. Generally speaking, a Landlord’s Waiver is an agreement between the lender and the borrower’s landlord which governs issues such as the priority of the parties’ respective security interests in the personal property owned by the borrower serving as collateral for the borrower’s loan, the right of the lender to access and liquidate the collateral, and the lender’s option to cure defaults under the lease.
What makes the dynamic of the Landlord’s Waiver complex is that the lender often has very little leverage over the landlord. Frequently, this leads to instances where landlords are either unwilling to sign a Landlord’s Waiver altogether or are unwilling to sign a Landlord’s Waiver containing the lender’s required terms. Of course, it is beneficial for the landlord to have a tenant with a successful enterprise and adequate cash-flow, and therefore, the tenant’s access to financing may be valuable to the landlord. Outside of that, however, landlords often fail to see much incentive to acquiesce to the lender’s request for a Landlord’s Waiver.
The failure to obtain a Landlord’s Waiver on the lender’s preferred terms is problematic on any commercial loan transaction because it can lead to disagreements between the landlord and the lender over a variety of issues. The result of these disagreements may be minor, such as the landlord may simply require payment of past due rent in exchange for the lender’s access to its collateral. However, the results may also be substantial. For example, the failure to have a Landlord’s Waiver may result in lengthy and costly litigation and/or the lender losing a priority claim in the collateral.
The failure to obtain a Landlord’s Waiver is especially problematic for Small Business Administration (“SBA”) guaranteed loans as the Landlord’s Waiver is often a requirement. The SBA requires a Landlord’s Waiver, containing specific provisions, from a landlord when there is: leased space where any personal property pledged as collateral for the loan is located; leased space where a substantial portion of the loan proceeds will be used to fund leasehold improvements; or a substantial portion of the collateral consists of leasehold improvements, fixtures, machinery or equipment that is attached to the leased space.
The SBA requirements, as set forth in the Standard Operating Procedures (“SOPs”) and the SBA National 7(a) Authorization Boilerplate, provide that a Landlord’s Waiver should, at a minimum, contain the following three provisions:
- Landlord shall subordinate its interest in the collateral, if any, to lender’s interest;
- Landlord shall provide lender at least 60 days’ written notice of a default under the lease prior to terminating the lease and shall provide Lender opportunity to cure the default (the SBA Authorization typically only requires a “reasonable” period to cure the default, but the SOPs contemplate a 60 day cure period where a “substantial portion” of the loan proceeds are to be used for leasehold improvements. Since it is subjective as to whether a “substantial portion” of the loan proceeds are to be used for leasehold improvements, we always try to err on the side of a more favorable cure period); and
- Landlord shall allow lender access to the leased premises to take possession of, and dispose of, the collateral.
See SOP 50 10 5(F) (revised 3/28/14, effective 1/1/14), at pgs. 187-88, and SBA National 7(a) Authorization Boilerplate.
The SOPs also have the following to say about Landlord’s Waivers:
- The Landlord’s Waiver gives the lender access to the leased premises and facilitates the liquidation of the collateral on the borrower’s premises and should be obtained for all SBA loans with tangible personal property as collateral.
See SOP 50 10 5 (F) (revised 3/28/14, effective 1/1/14) at pg. 188.
A strict reading of this language would require that the lender be allowed to actually conduct a sale of the collateral on the leased premises. We have found that this is often a sticking point for landlords. Although the landlord may be willing to allow access to the premises for purposes of removing the collateral, for a number of reasons, landlords do not want a sale happening directly on the premises. However, lenders should keep in mind that certain types of collateral may lose value if separated or removed from the leased premises.
Anytime a lender is contemplating foregoing a Landlords Waiver, or, in relation to an SBA guaranteed loan transaction, not obtaining a Landlord’s Waiver that meets the SBA’s requirements, the lender must evaluate the risk of doing so. For an SBA guaranteed loan transaction, per SOP 50 57, failure to materially comply with the requirements of the SBA Authorization or the applicable SOPs, such as not obtaining a required Landlord’s Waiver, could result in the SBA denying a request from the lender for the SBA to pay the SBA guaranty. If the lender’s actions, or the loss attributable to the lender’s actions, do not rise to the level of requiring a denial from the SBA, the SBA may contemplate a “repair”, wherein the SBA deducts a specific dollar amount from the amount the SBA would otherwise pay the lender on its guaranty, in order to compensate the SBA for the loss attributable to the lender’s actions. The SBA, generally speaking, determines a repair to be amount of the lender’s loss that would have been avoided had the lender complied with the SBA requirements. In other words, in each case, if the lender suffers a loss on the given transaction, the question will be whether the loss could have been avoided, or mitigated, if a proper Landlord’s Waiver was in place. When negotiating the execution of a Landlord’s Waiver both the SBA required terms, and any potential losses that may stem from the failure to include such required terms, should be considered by the lender.
A Landlord’s Waiver has practical benefits on all commercial loan transactions, including SBA and non-SBA loans, where personal property pledged as collateral is located in leased space. For one, the subordination of the landlord’s interest in the collateral can reduce the potential for disputes between the lender and the landlord in the event the lender needs to foreclose upon the collateral. Even where the landlord has not filed a UCC Financing Statement, many states provide landlords with a statutory security interest/lien in the collateral. Further, a Landlord’s Waiver may also clarify that the personal property of the borrower is to be considered personal property, so even if the personal property becomes affixed to the real estate, it will not be deemed a fixture. Additionally, an effective Landlord’s Waiver can allow the lender to take control of not only the collateral, but also the leased premises, which could facilitate a smooth conveyance of the collateral as well as the leased premises to a purchaser/subsequent tenant, which can be advantageous for both the lender and the landlord.