Landlords are often asked to sign “waiver letters” in relation to equipment leased to their tenants or acquired by their tenants with hire-purchase finance. Laura Oliver and Shanna Davison consider the implications of such letters and advise landlords not be too hasty in signing them.
Where a tenant leases equipment from third parties for use in their premises or enters into hire-purchase arrangements, it is good practice for the finance and leasing companies to ensure that the landlord waives its rights over such equipment. Landlords and their managing agents are often asked by tenants, usually at short notice, to sign standard form waiver letters. Although some landlords have a blanket policy of refusing to sign such letters, tenants can put great pressure on landlords to sign them urgently, claiming that without the waiver they will not be able to take delivery of a vital (and usually very expensive) piece of equipment and that any delay will be detrimental to their business. The underlying message to landlords is that this could impact upon the tenant’s ability to pay the rent, which usually persuades landlords to sign the letters without further consideration. Although landlords may want to accommodate these requests in the interests of good landlord and tenant relations, they should view these letters with caution.
Negotiating “standard” waivers
Finance and leasing companies often claim that waiver letters are “non-negotiable”. However, it is highly unlikely that the landlord will owe any contractual obligation (in the lease or elsewhere) to the tenant to sign a waiver letter, so the starting point should be that the landlord will only do so on terms which they consider to be satisfactory.
Most “standard” waiver letters will require the following key concessions by the landlord:
1. Title to the equipment will not pass to the landlord
At first glance this seems uncontroversial, but to the extent that the equipment is attached to the property, it may become part of the premises. This will commonly happen for integral plant and machinery such as lifts and air conditioning, but may also happen in relation to equipment which needs to be bolted into the structure of the building. The distinction is important because, without an agreement to the contrary and irrespective of the terms of the lease or the hire-purchase or leasing agreement, the equipment will belong to whomever has the right to occupy the building, which will be the landlord once the lease expires or is terminated (which will include the landlord forfeiting the lease).
This provision should only, therefore, be agreed by the landlord on condition that the finance or leasing company is obliged to remove the equipment following the termination of the lease, however that comes about and the finance or leasing company will need permission (whether verbal or written) to enter the premises to do so.
Depending on the nature of the equipment, the finance or leasing company may need a considerable period of time within which to access the premises and remove the equipment once notified to do so by the landlord (we have seen one instance where six months was required). The landlord should take into account that it may not be able to relet the premises during this period (or if it does it will need to carve out rights over the equipment), which may well have a financial implication. In these circumstances, the landlord should consider obliging the finance or leasing company to pay a licence fee, but this should be agreed in advance as it will be difficult to impose once the lease has terminated.
If the finance or leasing company fails to remove the equipment within the pre-agreed period, the landlord should have a right to do so and to store or dispose of it. Any proceeds (less removal, storage and disposal costs) will then belong to the finance or leasing company. This point is often highly contentious, not least because the equipment may have little or no value once it is removed or because it may need specialist disposal agents to obtain the best price on a sale.
2. The landlord must not take control of the equipment to recover rent arrears pursuant to their right to exercise Commercial Rent Arrears Recovery (the regime that replaced the landlord’s remedy of distress from 6 April 2014)
This is probably uncontroversial, but should be balanced against obligations on the finance/leasing company to remove the goods as set out above.
3. The finance/leasing company has the right to enter the property to remove the equipment
After the termination of the lease, this will be relatively straightforward and has been considered above. However, whilst the lease subsists, it may not be possible for the landlord to grant this right, either under the terms of the lease or as a matter of law. Any such right should therefore only be granted in so far as the landlord is lawfully able to do so.
The finance or leasing company should be obliged to make good any damage caused by the entry and removal of goods to the landlord’s satisfaction. This is particularly important where the equipment has been attached to the property in some way.
The landlord should also insist that any entry is at the risk of the finance/leasing company who should indemnify the landlord against any costs or claims arising out of such entry.
The landlord’s costs of reviewing and negotiating the waiver letter should be paid by the tenant and any initial discussions with the tenant should make this expectation clear.
When it all goes wrong
In the case of Michael Gerson (Leasing) Ltd v Greatsunny Ltd5 the Court of Appeal was asked to consider the implications of a landlord’s waiver letter following the tenant’s insolvency. The waiver letter provided that the landlord would give the leasing company 28 days following termination of the lease in which to remove the equipment.
At first instance, the judge held that notice of termination of the lease had been given during a telephone call between the landlord and the leasing company. This was despite the fact that the landlord did not have a copy of the waiver letter available to him and did not specifically intend to give notice to the leasing company to remove the equipment. Nor did the leasing company appreciate that the 28 day period had started to run. The Court of Appeal upheld the decision on the basis that it was not a requirement in the waiver letter for the landlord to give notice of lease termination in writing. As the equipment was fixed to the premises, it had become part of the building and the leasing company lost title to it after the 28 day period expired. Consequently, the landlord was entitled to re-let the premises with the benefit of the equipment.
Resisting the pressure
Many “standard” waiver letters should not be agreed without amendment. A balance needs to be struck between facilitating a tenant’s business needs and the implications of each term for the landlord and its interest in the property if things go wrong. As for tenants who require a landlord’s waiver for their hire-purchase or leasing arrangements, they would be well advised to approach the landlord as early as possible to avoid unnecessary delays.