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May 16, 2018

Best Practices: Obtaining Assignment of Leases and Landlord Waivers under SOP 50 10 5(J)

by Michelle Sergent Kaas

SOP 50 10 5(J), Subpart B, Chapter 4 provides the following:

A.  When a substantial portion of the loan proceeds are to be used for leasehold improvements or a substantial portion of the collateral consists of leasehold improvements, fixtures, machinery, or equipment that is attached to leased real estate, the Lender should obtain:

  1. An Assignment of Lease with:

a) A term including renewal options that equals or exceeds the term of the loan; and

b) A requirement that the lessor provide a 60-day written notice of default to the Lender with option to cure the default; and

c) A Landlord’s Waiver. 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.

Obtaining an assignment of lease and a sufficient landlord waiver that meets SBA requirements can be a difficult task.  The borrower loses bargaining power once a lease is signed, as the landlord has little incentive to negotiate.  If possible, the borrower and/or the lender should negotiate the landlord waiver when the borrower is negotiating the lease.  This will allow the parties an even playing field upon which to negotiate.  Should the parties not come to an agreement, then the borrower can look elsewhere for an acceptable lease.

The lender and the landlord have two competing interests when it comes to assignment of leases and landlord waivers. The lender needs to protect its collateral, to obtain access to the premises and to have time to remove its collateral upon default and/or termination of the lease.  The landlord, on the other hand, needs to remove the collateral as soon as possible in order to obtain a new tenant who will start paying rent.  Striking a balance between these competing interests is often challenging and time consuming.

If a landlord will not allow a blanket assignment of lease, then try to obtain a provision allowing an assignment upon certain criteria and/or approval of the landlord.  The landlord will more likely allow this if he has the power to approve the assignment.  If the landlord does not provide the lender with an opportunity to cure a borrower default under the lease, then propose language allowing the lender to cure the default within the same cure periods as set forth in the lease.  If the lender is subject to the same time periods as the borrower/ tenant, the landlord may be more likely to allow the lender the opportunity to cure the default.  If the landlord will not allow the lender 60 days to remove the collateral, then the lender can propose the payment of rent during this time period.  If the landlord is getting paid rent during this period, he may be more likely to give the lender the time it needs to remove the collateral.

The SBA has acknowledged the difficulties of obtaining assignment of leases and landlord waivers in the new SOP.  SOP 50 10 5(J), Subpart B, Chapter 4 now provides that “[i]f the Lender is unable to obtain the assignment of lease or landlord’s waiver Lender must document its file with the attempt to obtain the assignment and the landlord’s reason(s) for not providing it.”  Should you encounter a difficult landlord, make your best attempts to obtain the assignment of lease and sufficient landlord waiver.  If you are not able to obtain everything requested from the landlord, then follow prudent lending practices and document your file accordingly.

For more information on assignment of leases and landlord waivers, contact Michelle at mkaas@starfieldsmith.com or 267-470-1167.