What Commercial Landlords Need To Know About Landlord Lien Waivers Or Landlord Subordination Agreements August 17, 2017

By Danielle G. Garson and Andrew S. Perry

When drafting your commercial property lease, you (or your attorney) may have had the astute notion to include a provision which grants you, as Landlord, a security interest in your tenant’s personal property. Despite the express language, you may later be approached by your tenant to sign a landlord lien waiver or subordination agreement (“Lien Waiver/Subordination”) whereby you waive or subordinate your lien on the tenant’s personal property.  Typically, a tenant’s lender will request a Lien Waiver/Subordination to ensure that lender’s security interest in a tenant’s property, such as furniture, equipment, or inventory, is preserved and superior to any security interest of landlord in that same property.

You may wonder why you would voluntarily enter into such an agreement, especially when you have no specific lease obligation. As a practical and business-savvy landlord, it is imperative for you to recognize the importance of your tenant’s financial success.  To secure that success, the tenant presumably needs the loan to improve its business and generate revenues needed to pay the rent.

Nonetheless, just because you want your tenant to succeed does not mean you should sign any form waiver the lender throws your way.  To ensure that your rights as a landlord are properly balanced, you should consider the below:

Waiver vs. Estoppel

You will want to subordinate your lien on tenant’s property rather than completely waive it. Lenders typically agree to subordination, as their focus is receiving a first security interest. With subordination, the lender obtains priority, but your lesser secured position may still provide reduced recovery if the tenant defaults.

Collateral Description

The collateral description should be limited in scope and easily identified, avoiding blanket descriptions. The specificity of the definition will ensure that you do not waive or subordinate rights to property other than what was financed by the lender, including your own property, like real property improvements, plumbing, or fixtures. You could violate your own mortgage if you waive your interest in these items.

Landlord’s Notice Obligations

Landlords should only agree to use “reasonable efforts” to notify lender of a default which may result in a lease termination. Additionally, your failure to give notice should not void the default, prevent your ability to terminate the lease, or subject you to damages.

Lender’s Right of Occupancy

You should set limits on lender’s occupancy rights, providing that activities are only allowed at reasonable times and notice, and with your representative present. The lender should also agree to pay rent if the tenant fails to do so, obtain adequate liability insurance, covenant to repair any damage to the premises as a result of removing the collateral, and indemnify you from any liability or expenses resulting from its access and removal of collateral. Include language that lender’s failure to remove property by a certain date is considered abandonment, at which point you may remove such property from the premises.  In regards to auctions, you may want to prohibit lender from conducting a collateral sale onsite or, if you are inclined to allow a sale, lender must obtain your prior consent and the sale should be subject to your terms.  Lastly, lender should agree not to interfere with your efforts to lease the premises to a replacement tenant.

No Further Obligation Of Landlord

The Lien Waiver/Subordination must confirm that all of your obligations terminate upon the earlier of (1) tenant’s satisfaction of its loan; or (2) the end of lender’s occupancy period, in which any remaining collateral will be deemed abandoned.

Attorneys’ Fees

Finally, because you are negotiating and executing the Lien Waiver/Subordination as an accommodation, it is reasonable for you to require your tenant be a party to the agreement and compensate you for reasonable attorney’s fees incurred in negotiating the Lien Waiver/Subordination.

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