Lenders routinely request landlord subordination or waiver agreements as a condition of closing an SBA loan to borrowers operating from leased premises owned by a third-party landlord.  While the act of sending out the lender’s form of landlord subordination or waiver agreement is routine for loan closers, sometimes the process of obtaining the landlord’s signature is far from routine.

A landlord may have rights against a borrower’s property under the lease agreement, applicable state law, a contractual landlord’s lien, or other statutory or common-law rights. Depending on the jurisdiction and the lease, the landlord may have rights to assert claims against personal property located at the leased premises, which can conflict directly with the lender’s security interest.

A landlord waiver or landlord subordination agreement is designed to mitigate that risk for lenders.  Most lenders look to establish three rights in a waiver or subordination agreement:

• The landlord waives or subordinates its interest to the lender’s interest in the borrower’s collateral.
• The lender’s right to enter the leased premises to inspect, access, remove, and dispose of its collateral following a default, subject to applicable law.
• The landlord will provide the lender with notice of lease defaults and an opportunity to protect its collateral before the landlord takes action that could interfere with the lender’s rights.

Often upon landlord’s receipt of a waiver or subordination agreement, the landlord seeks to protect its rights under the lease agreement or applicable law and may require revisions to include the following:

• Identify collateral. Often landlords may ask that a specific collateral list be attached to the landlord subordination agreement and may not permit a generic collateral description.  This most often arises in the case of fixtures, which most landlords prefer to exclude from the definition of collateral or require that they be specifically defined.
• Limiting access or cure periods. Landlord has a vested interest in making the time for lender to enforce its rights under the subordination or waiver agreement as short as possible.  Lenders should take care in analyzing the type of collateral and what time periods the bank needs to realistically enforce its rights and recover collateral.
• Payment of Rent/Insurance/Indemnification provisions. Landlords typically will not allow the lender to access the leased premises indefinitely without payment of rent, furnishing evidence of insurance, and indemnifying landlord for claims that may arise from lender’s entry onto the leased premises.  In some cases, lenders may consider accepting revisions related to these obligations to preserve the bank’s ability to access the collateral.

Balancing the lender’s objectives with the landlord’s need to protect its interests, can make the difference between a landlord signing the lender’s form without significant negotiation and a transaction becoming delayed over the waiver.  For assistance with landlord waiver or subordination negotiations, contact the attorneys at Starfield & Smith, P.C. at 215.542.7070 or info@starfieldsmith.com.