Landlords and financial institutions are vital to most businesses. For example, retailers need landlords’ brick-and-mortar buildings for their stores, and they need bank loans to acquire inventory and finance operations. But when businesses fail, their landlords and banks can have conflicting claims to tenants’ leased premises and assets. Landlord lien waivers and consents address these potential conflicts.
Many states, such as Texas, give landlords statutory liens on tenants’ assets to secure rent obligations. In states without statutory liens, such as Massachusetts, landlords can still obtain Uniform Commercial Code (UCC) security interests or judicial liens on tenants’ assets. Some landlords include UCC security interests on tenant assets in the boilerplate language of their leases. Landlords’ liens and security interests limit tenants’ ability to secure bank financing, because banks generally insist on having their own first priority UCC security interests in tenants’ assets. To solidify their first position claims to borrowers’ assets, banks ask borrowers’ landlords to waive competing claims to such assets.
Typical lien waivers and consents require landlords to relinquish their claims to tenant inventory and equipment and to recognize banks’ superior security interests. However, banks should not expect landlords to waive rights to building improvements (such as flooring and mechanical systems) or tenant trade fixtures financed by landlords. Landlords’ rights to those assets should remain superior to bank security interests. Also, banks should consider allowing landlords to subordinate their claims, instead of waiving them, so landlords retain rights to remaining tenant assets after bank loans are repaid.
A second area of conflict between landlords and banks can occur when tenants default on loans, and banks need to enter the leased premises to seize and liquidate collateral. Banks want as much freedom as possible for such entry, and they sometimes assume that landlords should allow them extended periods of time for that purpose. However, tenants that default on loans are usually not paying rent either. Banks cannot expect landlords with defaulting tenants to provide free storage for their collateral or to delay from finding replacement tenants while collateral remains on the premises. Also, landlords may want to resist letting banks auction tenant inventory and equipment on their properties, because such distress sales can be disruptive and embarrassing.
On the other hand, landlords should not demand that banks pay exorbitant use and occupancy charges in order to remove their collateral from leased premises (but landlords are justified in charging banks reasonable access fees when tenants are not paying rent). Banks should indemnify landlords from damages caused by such removal and should maintain proper liability insurance protecting landlords and their properties during removal.
Some landlords balk at signing lender requested waivers and consents, arguing that landlords gain nothing from them. This is inaccurate. Tenants with bank financing can better manage cash flow, facilitating rent payments and inventory purchases. Landlords clearly benefit from having “bankable” tenants, and should willingly sign fair lien waivers and consents if asked. When landlords refuse to sign such agreements, or impose unreasonable conditions on them, tenants must anxiously sit on the sidelines while their landlords and banks debate. Tenants simply want the parties to reach agreement so they can secure bank financing.
Most leases do not specifically require landlords to sign landlord lien waivers and consents, and tenants can find themselves in difficult positions when their landlords and banks fail reach agreement. Therefore, when commercial tenants negotiate leases with landlords, they should consider simultaneously negotiating landlord lien waivers and consents that will satisfy potential lenders while addressing legitimate landlord concerns.
Christopher R. Vaccaro is a partner at Looney & Grossman LLP in Boston. His email address is cvaccaro@lgllp.com.
