In these uncertain economic times, tenants looking for loans from financial institutions are facing stringent requirements. Charges over tenants’ personal property are often insufficient. Lenders are increasingly taking extra precautions to safeguard their security by requiring tenants to obtain waivers of landlords’ rights of distraint over the tenants’ personal property.
WHAT IS A RIGHT OF DISTRAINT?
In the event a tenant defaults in the payment of rent, the landlord holds a common law right to seize the tenant’s personal property located within the leased premises in satisfaction of the tenant’s rent arrears.
AS A COMMERCIAL LANDLORD, WHY WOULD I AGREE TO WAIVE MY RIGHT OF DISTRAINT IN FAVOR OF MY TENANT’S LENDER?
Practically speaking, waiving a right of distraint may be a small price to pay to maintain a rent-paying tenant rather than risking the loss of a tenant who is unable to carry on its business due to lack of capital. It may also be an opportunity for the landlord to seek additional consideration from the tenant (i.e. new or increased security deposits and/or letters of credit) in exchange for waiving this valuable remedy. In negotiating a waiver of the landlord’s right of distraint, the tenant will find itself in the tenuous position of balancing the lender’s and landlord’s concerns, some of which may include the following:
- Ensure the landlord is on notice with respect to the lender’s security interest in the tenant’s personal property
- Define the lender’s security interest and establish its priority by obtaining a waiver (or subordina tion) of the landlord’s right of distraint
- Obtain from the landlord notice of any tenant default pursuant to the terms of the lease.
- In the event of tenant default, obtain the right to store the secured personal property at the leased premises and the ability to remove such secured property without any further notice or consent requirements.
- Exclude from the lender’s security interest any of the tenant’s personal property forming part of the leased premises’ leasehold improvements
- Provide a postponement of the landlord’s right of distraint in favour of the lender rather than a waiver thereof so as to preserve the landlord’s right to seize the balance of any remaining proceeds to apply to rent arrears, if any
- Limit the landlord’s covenant to provide the lender notice of tenant defaults pursuant to the terms of the lease
- In the event of default, (i) disclaim any obligation of the landlord to safeguard the secured property so that the storage is at the lender’s sole risk, (ii) collect occupation rent from the lender for the period of time the tenant’s personal property is stored on the leased premises, (iii) limit the lender’s access to the leased premises to seize the tenant’ s personal property to a specific timeframe and (iv) obtain the lender’ s commitment to repair any dama ge caused by the removal of the tenant’s personal property.
The tenant’s primary objective in managing this waiver negotiation will be to keep both the lender and landlord sufficiently happy to allow the tenant to obtain its financing. However, it is important for the landlord to be cognizant of the implications involved in waiving its right of distraint and to ensure it is sufficiently safeguarded in granting such a waiver. Accordingly, landlords are encouraged to obtain legal advice prior to embarking such waiver negotiations. If you have any questions or concerns relating to commercial tenancy matters, we encourage you to contact any member of our Real Estate Group.