Landlord Consents: Why and When?November 2019
Lenders and landlords have at least one thing in common: they are both creditors. Lenders extend credit by making loans, and landlords extend credit to their tenants by delivering possession of their property in exchange for a promise to pay rent over time. In many leases, the tenant grants the landlord a security interest in the property located at the leased premises to secure their lease obligations. Under the laws of many states, landlords also have the benefit of a statutory landlord’s lien. When a lender and a landlord are extending credit to the same borrower-tenant, they often enter into an agreement regarding (1) their potentially competing liens on the same property, (2) and the lender’s right to enter the leased property to reach its collateral. This “intercreditor” agreement is often called a Landlord Consent, a Landlord Waiver, or a Collateral Access Agreement.
A lender will frequently require its prospective borrower to obtain a Landlord Consent from the landlord of any property occupied by the borrower under a lease, if a material amount of collateral is located there. Where the site is particularly material, the Landlord Consent may be required before closing. In many cases, it is handled as a post-closing requirement, often on a “reasonable efforts” basis. Because the landlord is typically not directly involved in the tenant’s loan transaction, the lender and tenant have little leverage. Accordingly, most Landlord Consents strike a balance between the lender’s objectives and the landlord’s objectives.
From the lender’s perspective, the key issues to address in a Landlord Consent include (i) defining the collateral; (ii) notifying the landlord of its security interest and establishing priority of its security interest over the landlord’s lien whether through complete waiver or subordination; (iii) obligating the landlord or tenant to provide the lender any notice of default by the tenant; (iv) obtaining the right to store the collateral on the premises until it can be properly removed; (v) negotiating appropriate times to enter the premises and remove the collateral; and (vi) having the landlord agree that the lender is not responsible for any rents or other tenant obligations.
Although there is often negotiation of details such as the length of the advance notice requirement or the length of time a lender may stay on site, a lender usually focuses on (1) having the right to enter the leased property to retrieve its collateral, and (2) having the landlord’s lien be either waived or subordinated to the lender’s lien in the collateral. Without a contractual right of access, a landlord could potentially prevent the lender from entering the property, thereby complicating the legal repossession of the lender’s collateral. And without an agreement regarding lien priority, the lender may not have the security it thought it had when it made its loan.
The landlord’s objectives in negotiating a Landlord Consent include (i) subordinating, rather than completely waiving, the landlord’s liens on the tenant’s property; (ii) limiting the waiver of lien rights to only that property of the tenant that was financed by the lender; (iii) requiring the lender to provide written notice to the landlord prior to any removal of collateral; (iv) limiting the amount of time during which lenders can collect the collateral; (v) requiring the lender to pay monthly rent while it is occupying the property; (vi) requiring the lender to indemnify the landlord for any damages arising from the collection/repossession of the collateral; (vii) requiring the lender to name the landlord as additional insured on a certificate of insurance prior to entering the property; (viii) obtaining a release of all liability in connection with the collateral; (ix) minimizing the lender’s interference with operations of the landlord and other tenants; (x) including a provision stating that if the subject personal property is not removed within a given time period, then the tenant and the lender will waive any rights either party may have to the personal property, and it may then be removed by the landlord; and (xi) otherwise controlling the time and manner of removal of property and requiring that the lender comply with all rules and regulations regarding the landlord and the landlord’s premises, including permitted parties on the property, in connection with the collection and repossession of collateral.
By the time a lender is entering leased property to seize collateral, the tenant has defaulted under its loan documents and is likely having financial difficulties. If the tenant is also behind on its rent, the landlord would want to preserve the ability to terminate the lease and evict the tenant as quickly as possible. Landlords in this situation will resist provisions in Landlord Consents that delay this process, give a lender rights that are greater than those of the tenant, or prevent the landlord from marketing and re-letting the property.
Tenants generally act as “broker” in the negotiation of a Landlord Consent, and their primary objective is to make sure that an agreement is reached so that they can close their loan transaction or satisfy their post-closing obligation to procure a Landlord Consent. They usually don’t have much else at stake, as the allocation of rights between the tenant’s creditors—the lender and the landlord—will generally come into play only if the tenant is being liquidated.
A tenant can help the process by addressing the issue of Landlord Consents in its lease—by including an obligation of the landlord to execute a landlord waiver and consent at the request of a tenant, and possibly including a form waiver and consent approved by the lender as an exhibit to the lease.
If you have any questions or seek counsel regarding the above, please reach out to Mark Winings.