Bank.  The promissory note contained a late charge provision which stated that if any payment under the note was more than 15 days late, the borrower would be charged five percent of the amount due.  The Tabachnicks’ loan matured on September 30, 2004 and the balloon payment had not yet been paid.  PNC Bank demanded the payment of principal, interest and a late charge of $113,000, which was five percent of the entire principal amount due under the loan.  The Tabachnicks paid the entire amount but sued to recover the $113,000 on the grounds that such a late charge was usurious under the National Banking Act.

 

             Since the National Banking Act incorporates the usury laws of the state in which the national bank is located, the Court first looked to New Jersey’s usury statute to determine whether the late fee was usurious.  The applicable New Jersey statute explicitly states that “no corporation shall plead or set up the defense of usury to any action brought against it to recover damages or enforce a remedy on any obligation executed by said corporation.”  Additionally, the applicable federal regulation of the National Banking Act states that if the applicable state law denies the defense of usury to a corporate borrower, the bank may charge “a corporate borrower any rate of interest agreed upon by it.”  Since the late fee in the Tabachnicks loan documents was spelled out in terms of a percentage of interest rate, the Court ruled that the New Jersey statute and the National Banking Act regulation clearly applied, and the Tabachnicks’ usury claim failed.

 

             Thus, we are reminded of the importance of determining in advance that any late fees and similar changes in a lender’s loan documents are consistent with applicable state law to be sure such changes will be enforced in the event of a default.

 

             This case is cited as Tabatchnick Realty group, LLC v. PNC Bank, N.A., No. 05-CV-3027 (D.N.J. 05/15/07).

            

            
             Under what circumstances should a lender be concerned about the need for a landlord waiver?  Whenever a substantial portion of loan proceeds are to be used for leasehold improvements or when a substantial portion of the collateral consists of leasehold improvements, fixtures, machinery or equipment that is attached to the leased real estate, such a waiver needs to be considered.  Some leases provided that a landlord has a security interest in the tenant’s furniture, fixtures and equipment.  In some jurisdictions, a landlord will have a priority claim upon a defaulting tenant’s assets.  Hence, it is important that the landlord, the tenant-borrower and the lender have a clear understanding as to the relative priority of the landlord’s and the lender’s claim to the tenant-borrower’s assets.

 

             A landlord’s waiver should address the following items:  First, the landlord should be required to provide notice of a tenant’s default to the lender.  Second, the document should address whether the lender has any right to cure a tenant’s default under the lease and the right to reassign the lease in the event of a loan default.  Third, the document must address under what circumstances a lender may remove collateral from the leased premises.  There are many different forms of landlord waiver and we recommend that lenders consult with counsel as to the proper form for a loan transaction.

 

 

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Tip of the Month:  The Importance of Landlord Waivers