Landlord Waiver/Subordination Agreement in Commercial Leasing

A Landlord Lien Waiver or Subordination Agreement is a legal document in which a landlord agrees to waive or subordinate any security interest they may have in a tenant’s personal property, such as inventory or equipment, located within the leased premises. This typically becomes relevant when a tenant obtains a loan using this property as collateral. The tenant’s lender will usually require the landlord enter into an agreement with the lender allowing the lender sufficient access to seize the tenant’s property if the tenant defaults on the loan.  These agreements help provide tenant’s access to financing required to operate their businesses, while also ensuring that a lender’s security interests in a tenant’s personal property are protected.

Considerations in Negotiating a Landlord Waiver/Subordination Agreement

1. Scope of the Waiver or Subordination

One of the primary considerations in negotiating a Landlord Lien Waiver or Subordination Agreement is defining the scope of the waiver or subordination. This involves specifying which personal property is covered by the agreement. Typically, it includes the tenant’s inventory, equipment, and other business assets that serve as collateral for the loan. The landlord must clearly understand the extent of the property covered to avoid future disputes.

2. Notice Requirements and Lender Access

These agreements generally require the landlord to provide notice to the lender in the event of the tenant’s default under the lease or the termination of the lease. This notice allows the lender to take necessary actions to protect its collateral, which may include seizing the tenant’s property.

The agreement often provides that the landlord must provide the lender with a specified period of notice before taking any action that would affect the lender’s collateral. This period allows the lender to arrange for the removal of the collateral or other protective measures. Additionally, the agreement may grant the lender the right to enter the leased premises to seize the personal property. However, the landlord typically seeks to impose limitations on this access.

3. Limitations on Lender Access and Activities

Landlords usually include specific limitations on the lender’s access to the property. These limitations can cover several aspects:

– Time Frame: The agreement may specify a limited period during which the lender can access the premises to retrieve collateral. This ensures that the property is not occupied indefinitely by the lender, which could disrupt the landlord’s ability to lease the space to a new tenant.

– Rent Payments: If the lender needs access to the premises, the landlord often requires that the lender pay rent for the duration of their access, if the tenant has stopped paying rent. This provision protects the landlord’s financial interests and ensures they are compensated for the continued use of the space.

– Prohibition of Liquidation Sales: Landlords typically prohibit the lender from conducting liquidation or “fire” sales from the premises. Such sales could negatively impact the property’s reputation or the business environment for other tenants. Therefore, any liquidation activities must generally be conducted offsite or in a manner that does not disrupt the property’s operations.

4. Reimbursement of Landlord’s Costs

It is common for leases to include provisions requiring the tenant to reimburse the landlord for any costs associated with negotiating a Landlord Lien Waiver or Subordination Agreement. These costs may include legal fees and administrative expenses. This reimbursement clause ensures that the landlord does not bear the financial burden of facilitating the tenant’s financing arrangements.

5. Timing and Flexibility

While these agreements can be negotiated at any point during the lease term, it is often advantageous to address them during the initial lease negotiations. This proactive approach ensures that all parties understand their rights and obligations from the outset. However, flexibility may be required, especially if the tenant’s financing needs change during the lease term.

Conclusion

Landlord Lien Waiver and Subordination Agreements require careful negotiation to balance the interests of the landlord, tenant, and lender. When done correctly, these agreements protect a landlord’s interests while allowing a tenant to obtain the financing required to operate its business.