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June 17, 2015

Best Practices: Negotiating Landlord Waivers

by Starfield & Smith

The SBA requires that Lenders obtain a landlord waiver when an SBA loan is secured with personal property that is located at a leased location. The purpose of the landlord waiver is to ensure that the Lender has access to the premises and to facilitate the liquidation of collateral if the loan defaults. Since the landlord waiver subordinates any rights the landlord may have in the collateral located on the leased premises to the Lender, the landlord waiver is an agreement that the Lender wants and frequently, the landlord does not. Therefore, getting a landlord to sign a landlord waiver and agreeing upon its terms is a recurring challenge that Lenders have to face.

To induce a landlord to sign a landlord waiver, it is critical for the Lender to approach the landlord when the Lender and the borrower have bargaining power. Ideally, the landlord waiver should be signed at the same time as the lease is signed. If that is not possible, the mere fact that the borrower/lessor is obtaining a loan can provide the Lender with some bargaining power because the loan will help the borrower’s business and enable it to make its payments under the lease. Generally, the Lender should start negotiations with the landlord as soon as the Lender knows that collateral will be located on the leased property. The loan should never close before the landlord waiver is signed, otherwise all bargaining power is lost. Indeed, if the value of the collateral located at the leased premises is the primary security for the loan, the Lender should consider whether to enter into the loan unless a satisfactory landlord waiver can be obtained.

Accordingly, the Lender and landlord need to agree upon the terms of the landlord waiver. The provision regarding landlord waivers in the National Authorization 7(a) Boilerplate provides minimum guidelines as to what the landlord waiver should include: “Lender must obtain a written agreement from all Lessors (including sublessors) agreeing to: (1) Subordinate to Lender Lessor’s interest, if any, in this property; (2) Provide Lender written notice of default and reasonable opportunity to cure the default; and (3) Allow Lender the right to take possession and dispose of or remove the collateral.” The last requirement raises two additional issues for the Lender to address in the landlord waiver: (i) how much time the Landlord should have to possess the premises for the purposes of disposing of the collateral and (ii) what the Lender should pay in holdover rent during that period, if anything.

To determine what amount of time should be provided for the Lender to occupy the premises and dispose of the collateral, the Lender should consider the nature of the collateral. If the collateral is something small and easy to transport, like inventory, the Lender may agree to a shorter time period. If the collateral is large machinery or equipment, a longer time period will be necessary for the Lender to remove the collateral from the leased premises. When large equipment or machinery is involved, the Lender may want to contact the person who appraised the equipment or machinery, if any, and ask for an estimate of how long it would take to safely remove the collateral.

Regarding the amount of holdover rent, the landlord may try to insert a provision into the landlord waiver whereby the Lender has to assume the lease and cure all past rental and other monetary defaults to be able to enter the premises and dispose of the collateral. The Lender should not agree to this. Rather, if holdover-rent is to be paid the landlord waiver should limit such rent to a per diem occupancy fee for the period of time that the Lender is actually in possession of the premises.

Finally, Lenders should be weary of any indemnification language that the landlord wants to include in the landlord waiver. Many times the landlord will insert a provision that that requires the Lender to indemnify the landlord for all claims that the borrower may exercise against the landlord. The Lender should not agree to provide blanket indemnity to the landlord for any possible claims that the borrower may bring, especially because the borrower will be a party to the agreement and is the one requesting the landlord’s consent. Rather, to the extent an indemnification is warranted, the Lender should limit any such indemnification to indemnify the landlord only from claims that borrower may have in connection with the Lender exercising its rights under the landlord waiver.

For questions regarding landlord waivers, contact Sarah at sminteer@starfieldsmith.com or at 267-470-1217.