Having enforceable security over all of a borrower’s assets is obviously of primary importance to a lender. However, where a borrower occupies leased premises, ensuring the lender has quick and reliable access to the collateral is equally important, especially if the landlord proves to be unco-operative after a borrower’s default. Although court-ordered access to a borrower’s leased premises can be sought after a borrower’s loan default, a landlord waiver obtained prior to an initial advance of a loan can bring some added certainty to the realization process outside of a bankruptcy.
The provisions contained in a landlord waiver will vary depending upon the overall bargaining power of a borrower in terms of whether it is a single tenant of a large leased premises, or just one of many tenants in a multi-unit building where the rental income provided by the borrower is not material to the landlord’s business.
Ideally, a landlord waiver will include a waiver by the landlord of all of its present and future liens and rights of distraint against the inventory and other secured collateral of the applicable borrower. This waiver will reduce the lender’s exposure to rental arrears that could arise after the loan is advanced.
An acknowledgment from the landlord that the collateral is deemed to be the personal property of the borrower and not a fixture of the leased premises is another key component of a landlord waiver. This acknowledgment will ensure any collateral in the form of heavy machinery and similar assets do not inadvertently become fixtures that constitute property of the landlord as owner of the leased premises.
A landlord waiver will often provide a lender with the right to occupy the leased premises for a negotiated period of time for the purpose of possessing, removing or selling the collateral. The lender will of course need to pay a negotiated amount of occupation rent for the right of easy access to the collateral, but it can generally avoid any responsibility for putting the lease back in good standing by paying all rental arrears and curing other lease defaults.
Finally, the landlord waiver will ideally include an obligation on the part of the landlord to obtain its mortgagee’s consent and agreement to comply with the terms of the landlord waiver.
There are many alternative provisions that can be negotiated into a landlord waiver to address any specific characteristics of a particular borrower or a particular leased premises. But having a landlord waiver in advance of a borrower’s default at least gives the lender a better position to bargain from, as opposed to trying to negotiate access to the leased premises with the landlord after the loan is in default.
Lenders should ensure their term sheets and commitment letters specifically refer to the requirement for the delivery of a landlord waiver in respect of each leased location of the borrower where a material amount of inventory and other collateral is located.