Best Practices: Why do we need landlord waivers anyway?

SBA requires landlord waivers whenever SBA loans are secured with business personal property which is located at a leased location in order to protect the SBA and maximize any recovery when collateral must be liquidated.  Lenders often ask us for guidelines as to when and under what circumstances landlord waivers may be waived. Unfortunately, there are no easy answers because the laws in this area are extraordinarily complex and differ from state to state.

Since state laws are so diverse, it is advisable for lenders to develop a state-by-state strategy of how to best approach obtaining landlord waivers. Some states recognize statutory landlord liens that allow a landlord to seize the property of its tenant for unpaid rent. In these states, landlord liens can (but don’t always) have priority over other liens and security interests, even including a lender’s interest in collateral. In some cases, the landlord’s rights are very strong and will trump a lender’s rights even if the lender’s interest is prior in time to the landlord’s interest. Conversely, in other states, the landlord’s rights are limited significantly by the timing of the landlord’s levy on the collateral. In still other states, a lender’s ability to trump a landlord lien may be dependent upon whether or not the lender possesses a purchase money security interest.

Regardless of whether or not a state recognizes landlord liens, it is always advisable to obtain a landlord waiver because it puts the landlord on notice of the lender’s security interest in the collateral. However, as these documents tend to be highly contested, the lender should begin negotiating the landlord waiver as early as possible. If the borrower has not yet signed a lease, the borrower should get the landlord’s waiver signed contemporaneously with the lease if possible. Also, because landlord lien laws are very closely tied to UCC laws in many states, it is always a good idea to perfect the lender’s security interest as early as possible by pre-filing UCC financing statements.

In drafting or negotiating a landlord waiver, there are three provisions that are always required by the SBA. First, the landlord must subordinate or waive its interest in the bank’s collateral. Second, the landlord must notify the lender in writing if there has been a default under the lease by the tenant. Along with notice, the landlord should provide the lender with a reasonable opportunity to cure the default. Finally, the landlord must provide the lender with access to the premises to allow the lender to liquidate the collateral. In addition to the above provisions, if there are substantial leasehold improvements financed with the loan, and these improvements contain a substantial liquidation value, lenders should also obtain a collateral assignment of the lease so that the lender may retain maximum flexibility and leverage in a liquidation.

Some landlords simply will not agree to sign a landlord’s waiver or will not agree to certain terms. If that is the case, the lender needs to decide whether it can proceed without the waiver, or without some of the required provisions. The lender first needs to make a business decision about how significant the collateral is to the loan. If the collateral in question is insignificant, the lender may choose to take a risk and move forward without the waiver.  However, because making such a decision will often mean that the lender’s security interest may not have priority, lenders will want to explain the basis of any such decision in its credit memo.

If the personal property collateral has a substantial liquidation value, the lender may wish to have counsel review the matter to determine whether the landlord has rights that will trump its security interest. This analysis will help to inform the lender on the necessity of securing a waiver or subordination.  If in doubt, we recommend securing a written subordination or waiver, or face the possibility of a repair to the SBA loan guaranty.

In conclusion, it is wise to remember that lenders are always held to a prudent lending standard in this arena.  This means that, whenever possible, obtain a landlord waiver or subordination.  In those circumstances when this is not possible, lenders may need to decline moving forward, especially if the personal property collateral has substantial value. However, when moving forward without a landlord waiver or with a landlord waiver that does not contain all of the provisions listed above, recognize that such a decision contains some degree of risk.  Accordingly, be sure to thoroughly document all credit decisions to avoid second-guessing by SBA in a guaranty purchase situation.

For more information on landlord waivers and how lenders can protect their liens, contact the author at 215-542-7070, or jconn@starfieldsmith.com.