The importance of a landlord waiver in a liquidation situation cannot be understated. Often, a landlord waiver agreement is viewed as just another document to collect in order to close a loan, but the terms of that agreement are of utmost importance to a lender in a liquidation situation.
The SBA generally requires landlord waivers when a borrower leases its business location. Having a landlord waiver is prudent in any situation where a lender has collateral securing the loan located in a leased space. The SBA’s SOP 50 57 2 requires that lenders liquidate business personal property collateral if the recoverable value will exceed $5,000.00, which makes a landlord waiver a critical agreement to allow a lender to engage in a cost efficient liquidation.
When lenders are negotiating the terms of a landlord waiver they should keep in mind the type of business equipment that will be located in the leased space. Lenders should negotiate terms that (i) require a landlord to provide notice of a lease default and/or termination, (ii) allow access to the leased location to inspect and potentially remove the collateral, and (iii) to ensure that any claim the landlord may have against a borrower’s collateral is subordinate to the lender’s claim to the collateral.
Oftentimes, landlords will negotiate the terms of the landlord waiver, and lenders should be mindful of the consequences of those negotiations. Lenders should consider the type of collateral that will be located in the leased space, when agreeing to the landlord’s revisions. If the equipment is large equipment that takes effort, time and expense to move, lenders should consider negotiating with a landlord for the right to hold a sale of the collateral at the leased location, or for a longer time period to remove the collateral before incurring rent charges. If the collateral in the leased location has minimal value or is easily movable, then a lender may not need as much time to remove the collateral or need to hold the sale at the leased location.
Lenders should make sure they review their landlord waiver as soon as there is any indication that a borrower may be at the brink of a loan default. The faster a lender can get in touch with a landlord and begin making arrangements to liquidate the collateral, the better. In the case of less favorable terms or no landlord waiver, a lender may be facing a landlord who may hold collateral hostage to try to extract money from a lender in order for the lender to access and remove the collateral. Having to engage an attorney to go to court to get an order to access the collateral can be expensive and cost prohibitive depending on the collateral.
Failing to get favorable terms in a landlord waiver can end up costing a lender time and money that could be avoided with a well drafted landlord waiver. Further, failure to liquidate collateral may result in a repair to a lender’s SBA guaranty, so landlord waivers can be vital in avoiding costly liquidations and guaranty repairs. For assistance with negotiating landlord waivers or liquidation assistance, please contact the attorneys at Starfield & Smith at 215.542.7070.