So, Why Hasn’t My Commercial Loan Closed?
Even the most qualified borrowers can experience delays in closing their commercial loans. Several components and third parties affect the timing, cost and difficulty in closing a loan transaction. The actions or inactions of any one of these third parties can delay closing. Who are these entities with so much influence? The title company, the seller, the appraiser, the environmental engineer, the borrower’s other creditors, the borrower’s tenants and landlords... the list goes on. This article will focus specifically on how the borrower’s landlord and tenants may contradict the interests of the lender and impact the timing and cost of the loan closing.
Borrowers often operate out of a leased property, so if the borrower goes out of business or files bankruptcy during the term of the loan, it falls on the lender to deal with the borrower's landlord. If a loan will be secured by the borrower’s business assets, and those assets will be located on leased property that is owned by a third-party landlord, there is a strong chance the lender will require an agreement between the landlord and the lender prior to the closing of the loan. This agreement is often called a “Landlord’s Waiver” or “Landlord’s Agreement.”
When properly drafted, the Landlord’s Waiver provides the lender with access to the borrower's leased premises after an event of default under the lease or the loan. In many cases the Landlord’s Waiver facilitates the liquidation of the collateral on the leased premises in order to mitigate the expense and hassle of removing the collateral from the leased premises so that it can be sold from a different location. Although a Landlord's Waiver is a "simple" document, the negotiation of the terms of the Landlord’s Waiver may cause delays in the closing of the loan.
If a commercial loan will be secured by the borrower’s real estate, the lender will want assurances that its mortgage lien has priority of the borrower’s tenants’ leasehold interests in the property. The lender likely will require a Subordination, Non-Disturbance and Attornment Agreement (SNDA) from all or at least the major tenants prior to closing the loan. An SNDA is a three-party agreement between the borrower, the lender and the tenant leasing the borrower’s real estate, consisting of three components:
- The tenant agrees that the lender’s mortgage lien has priority over the lease, and if the lender forecloses its mortgage lien, the lease may be terminated if the tenant is in default under its lease.
- The lender agrees to not disturb the tenant’s possessions if the lender forecloses and the tenant is not in default under the lease. If the borrower leases its property to an affiliated tenant, the lender may not agree to include non-disturbance provisions in the SNDA.
- The tenant agrees to recognize the lender, or any successful purchaser at a foreclosure sale, as the tenant’s new landlord.
As commercial lenders have become more stringent in enforcing the provisions of their loan documents, including the SNDAs, tenants may not be so willing to accept the lender’s form of SNDA. In fact, large tenants often insist upon using their own form of SNDA to ensure that if a lender forecloses, the tenant’s interests in the lease and the property are protected adequately. If the borrower leases its property to multiple tenants, negotiations between the lender’s attorney and the attorneys for each of the borrower’s tenants may delay the loan closing process.
Fortunately, a prudent borrower can avoid most of the major setbacks by performing a few customary due-diligence steps during the early stages of the process:
- Ask the lender to furnish a closing checklist detailing all of the lender’s requirements to close the loan, including all of its requirements from the borrower’s tenants and landlords.
- Provide copies of the borrower’s leases (and lease amendments) and, if applicable, a current rent roll of the borrower’s property.
- Inform the borrower’s tenant(s) and landlord(s) of the upcoming loan closing and the expected date of the loan closing.
- Request copies of the lender’s, tenant’s and landlord’s forms of SNDAs and Landlord’s Waivers, as applicable, well in advance of the loan closing and circulate those forms to the lender, the borrower’s tenant(s) and landlord(s).
Completing these steps requires the expenditure of both time and money, but can ensure that the process of closing the loan is a smooth one.
Michael Smith is a lending attorney at Lerch, Early & Brewer whose clients include large national financial institutions as well as local community banks. For more information on closing a loan, contact Michael at (301) 657-0166 or email@example.com.