Understanding the Nuances of the Landlord’s Lien Waiver Agreement
Your commercial tenant needs financing to purchase some equipment for its business, but to do so, the tenant’s lender wants you to waive your right as landlord to acquire the tenant’s property in case of default.
Should you sign one of these lien waiver agreements? Only if you cover your bases.
More often than not, a landlord presented with a landlord’s lien waiver agreement will agree to the waiver. It is in a landlord’s best interests to have successful tenants who invest in their businesses (and pay their rent on time). It also makes sense a lender would want to collect equipment purchased with a defaulted loan to recoup losses.
However, before signing that agreement – often a one-to-two page document that appears harmless on its face – the landlord should address several key concerns.
- Subordination Rather Than Waiver
Some lenders, if asked, will agree that the landlord can subordinate its lien to the lender’s lien rather than waive it completely. With subordination, the lender stills obtains priority over any landlord claim to the personal property, but the landlord has not lost its lien. Before signing a waiver, a landlord should determine whether subordination is possible.
- Definition of Personal Property
The landlord’s Waiver Agreement should not extend to the tenant’s entire personal property. The landlord should tailor the definition to exclude any of the tenant improvements financed by the tenant allowance given to the tenant by the landlord. Nor should the personal property include any of the utility systems located in the premises or any auxiliary systems. Optimally, if the financing is for specific equipment, the landlord should limit the waiver to that specific equipment.
- Limits on the Lender’s Activities in the Premises
The landlord’s waiver agreement will often allow the lender to access the premises to secure, sell and remove the tenant’s personal property. The landlord should require limits on such activities. The lender should give the landlord reasonable prior notice of any entry. Any activity in the premises, including the removal of the equipment must comply with the lease and the landlord’s rules and regulations. Any auction or sale of the property must be conducted off premises, or if on premises must occur during certain dates and times. Finally the lender, at the lender’s cost, must repair any damage to the premises caused by the removal.
- Limits On the Time the Lender Can Exercise its Rights
Even if the landlord is not concerned with waiving its lien, the landlord should ensure it is never put in a position of wondering whether a lender is going to exercise its lien rights and come to collect the property. There must be a final date upon which the lender can act. If the landlord is required to give the lender notice of a tenant default or of a termination of the lease, the landlord should require that the lender remove the property within a certain number of days (often 30-60 days) after receipt of such notice. If the personal property is not removed within such time, then the lender’s lien is deemed cancelled and the landlord can dispose of the property. In addition, if the tenant defaults under the loan and not the lease, and therefore no landlord notice is given, but the lender has a right to access the premises, there similarly must be a stated length of time within which the lender has to remove the property before the lender loses its lien rights.
- Landlord’s Notice Obligations
As mentioned above, a waiver agreement will often require the landlord to send notice to the lender when the landlord sends the tenant a notice of default or prior to terminating the lease. But what happens, when well into a multi-year lease term, the landlord forgets about the lender and does not provide the notice? The waiver agreement should provide that the landlord’s failure to give the notice does not negate the tenant’s default, prevent the termination of the lease, or subject the landlord to any claim for damages or other liability under the waiver agreement.
- Rent Payments
Since the lender could be occupying the premises for a significant period of time, the waiver agreement should require the lender to pay to the landlord a per diem rent (often the lease rate) for the period of time that the lender has the right to occupy the premises.
Although a landlord may not be interested in its tenant’s furniture and equipment, and may feel adequately secured through a guaranty and security deposit, the landlord should carefully review and negotiate the waiver agreement to ensure the protections mentioned above are addressed.
Ann Marie Mehlert is a real estate attorney who works with real estate developers, investors and owners on all aspects of commercial real estate. For more than 25 years, she has negotiated and documented transactions from acquisition and financing through development, leasing and sales. For more information on landlord’s lien waiver agreements, contact Ann Marie at (301) 907-2803 or firstname.lastname@example.org.