Problem Loans: Landlord’s Waiver, a “Must” Document

An asset-based lender must be prepared to sell the collateral to get the loan repaid. Often, the collateral is sold at auction, and it is essential that the lender be able to give access to the auctioneer and give the auctioneer plenty of time to set up and advertise the auction.

Borrowers often operate out of leased premises, so if the borrower goes out of business or files bankruptcy, it falls on the lender to deal with the borrower’s landlord. Like the lender, the landlord probably has not been paid and is going to try to get the lender to cure the borrower’s default. Faced with a recalcitrant landlord, a lender can find its costs rising dramatically as it debates the Hobson’s choice between paying off the landlord and going to Court to gain access to its collateral.

Most asset-based lenders try to anticipate this standoff at the outset, when borrower, landlord and lender all are optimistic and willing to deal. JMBM Special Assets Team™ member Barry Freeman tells us why a lender ought to get a Landlord’s Waiver and what terms ought to be included. Barry has a long track record representing asset-lenders and other secured lenders, as do many of us on the JMBM Special Assets Team™. If you are making, restructuring or collecting asset-based loans, give us a call.

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LANDLORD’S WAIVER: “A MUST DOCUMENT”

By Barry V. Freeman

1. General Comments

A Landlord’s Waiver (“Waiver”) is a critical document in the asset based or secured lender’s loan documentation. When properly drafted, it provides the secured lender with access to the borrower’s leased premises and facilitates the liquidation of the collateral on the borrower’s premises thereby avoiding the costs and difficulties of removing the collateral and related foreclosure expenses. Liquidation of the collateral is usually accomplished on the borrower’s premises without any additional payments to the borrower as per appropriate provisions of the Loan and Security Agreement.

Unfortunately, if the Waiver is not obtained when the loan is documented and prior to funding, it is extremely difficult to obtain thereafter especially after the borrower has defaulted. This is due to the lack of any significant leverage in favor of the lender. After default this negotiating disadvantage is compounded by the fact that the borrower mostly likely has also defaulted in rental payments and the borrower lacks leverage with the lessor. The lessor wants the borrower out of possession of the premises so they can be relet, and usually has no concern for the lender and its problems in liquidating collateral and does not desire a highly publicized auction to take place on the premises with scores of uninvited guests tramping through the premises upsetting other tenants, etc. Additionally, the cost and removal of collateral such as heavy equipment requires the lender to find a new location, accomplish new utility hook ups, etc. all of which increase the lessor’s leverage and render the secured lender in the unpleasant position of having to “pay the piper.” Also, the proposed auction will frequently violate the terms of the borrower’s lease which limits the use of the premises to certain specified purposes which do not include an auction. Thus, dealing with the lender after default often unnecessarily places the secured lender at the mercy of the lessor.

2. Common “Demands” of Lessor.
If the lender gives the landlord an opening, the landlord may make overreaching demands on the lender, such as the following:

(1) Cure existing rental defaults; (2) Cure other lease defaults such as utilities, taxes, insurance, etc.; (3) Post with the lessor a deposit for rentals to be paid by the lender at a current non prorated level which may be substantially in excess of what the borrower was paying under its lease; (4) Indemnifications arising from the lender’s possession and liquidation of the collateral including proof of insurance; (5) Indemnification and curing of environmental issues and damages that may have been caused by the borrower’s occupancy.

Obviously, the foregoing list is not exclusive and each situation presents new facts. Once the borrower has defaulted, it is normally in no position to make the lessor’s requested payments and the collateral may not possess sufficient equity to absorb them resulting in the secured lender “dipping into its own pocket” to accomplish the liquidation and perhaps ultimately realizing a loss on the credit. These issues should not exist if the lender properly documents the loan and appropriately considers the liquidation expenses in its underwriting so that advance rates are adjusted to accommodate these anticipated expenses. Obtaining the Landlord’s Waiver is a critical and sometimes overlooked document. At the outset of a lease, the lessor anticipates a rent flow and cash may be available from the lender. Therefore the landlord is more flexible especially if the borrower’s lease deposits will be funded from the initial advance.

A typical Waiver confirms that the collateral shall remain “personal property” and not become fixtures and deemed to be part to realty and thus, owned by the lessor. As personal property, it remains collateral and can be separated from the realty. Obvious issues that arise relate to potential collateral that is “embedded” in the real estate or an integral part thereof such as air conditioning, plumbing, heating, ventilation, etc. These and similar items generally are not relied upon by the lender as part of its collateral and can be carved out of and not subject to removal and sale by the lender upon default (unless the parties agree otherwise).

A critical provision of a typical Waiver grants the lender a license to enter upon and to have possession of the premises for the purpose of doing everything necessary to dispose of the collateral including assembling, preparing for sale, advertising, conducting a sale on the premises and the removal of the collateral upon completion of the sale. A critical question and a sensitive area of negotiation is what period of time is required to prepare for the actions and when does the occupancy period commence. Bear in mind that the automatic stay instituted by the filing of a bankruptcy petition will restrain the lender and its ability to liquidate and bankruptcy is a realistic possibility when the lender is attempting to foreclose. Thus, there are no “pat” answers to the amount of time necessary to accomplish liquidation and the time required depends upon the type of collateral involved and what must be done to conduct a “commercially reasonable” disposition (i.e., preparation, advertising, removal of collateral, etc.). Liquidating inventory which can be moved to another location is one thing, heavy equipment that needs to be cleaned, tested, removed and premises restored after removal is another. Each case must be reviewed individually. The lender is well advised to contact the appraiser who initially valued the collateral for assistance as well as the auctioneer to be retained for guidance in liquidating the collateral and determining what time is required to properly dispose of same.

Critical to the lender as well as the lessor, is the amount of rent to be paid. The lender does not want to assume the lease, cure past rental and other monetary defaults. Rather, the normal approach is for the lender to agree to pay a per diem occupancy fee for the period of time it is actually in possession, which includes the time given to remove collateral by auction purchasers and clean up. The amount of rent is usually a prorated per diem rental based upon the prior monthly rent and “pass throughs” such as utilities, taxes and insurance. The lessor will require the property to be returned in the condition it was when rented to the borrower, and not the condition when turned over to the lender.

This approach may be not satisfactory to the lender who may refuse to take possession of all of its collateral based upon environmental issues, etc. and therefore the lender should negotiate for a return of the premises to the condition they were in when delivered to the lender. For example, it is not uncommon for lenders to view collateral as worthless and abandon same when hazardous waste and environmental issues outweigh its value. This may be true with respect to paint lines, certain types of conveyors, etc. These issues, if possible, should have been addressed and factored into the situation of the time of obtaining the Waiver and determining the amount of advances.

Other issues to cover in a Waiver include the issue of what liability remains with the lender under the Waiver if the loan is sold or assigned, choice of law and waiver of jury trial. Most landlords will generally require that the lender name the lessor as an “additional insured” under the lender’s policy.

Although a Landlord’s Waiver is a “simple” document, it may be critical to the lender’s successful liquidation of collateral. If not obtained at the outset, liquidation could prove expensive and make the difference between a successful collection effort and a major loss.
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This is Dick Rogan, bank lawyer and author of www.SpecialAssetsLawyer.com, signing off for now. Join us again soon to check out what’s new in the World of Workouts.

Year after year, day after day, workout professionals in the know rely on JMBM’s Special Assets Team™ to handle problem commercial and real estate loans. Whatever problem loans you have, chances are, we’ve seen it. Give us a call.

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Our Perspective. JMBM represents commercial banks, special servicers, private lenders, asset-based lenders, hard money lenders and factors. We help lender clients throughout the United States craft business and legal solutions to their commercial and real estate troubled loans. For more information, please contact Dick Rogan at RRogan@JMBM.com, or (415) 398-8080.

Richard A. Rogan is Chair of the JMBM Special Assets Team™. He also serves as the co-managing partner of JMBM’s San Francisco office and co-chair of its Bankruptcy Practice Group.

JMBM’s Special Assets Team™ has represented hundreds of lenders in California and throughout the United States. We regularly appear in bankruptcy courts, district courts and superior courts. We are proud to serve as trusted counsel and advisors who look for a business solution and try to help lenders find the best possible resolution for each troubled loan. Whether a loan is being newly documented, restructured or litigated, JMBM’s Special Assets Team™ has the skill, know-how and experience to solve your problem in a practical no-nonsense way.

NOTE TO CONSUMERS: As a matter of Firm policy, JMBM does not represent individual consumers who have disputes with their lenders. Many lenders have specialized consumer workout professionals who have the time to help consumer borrowers. There are many fine attorneys who specialize in representing consumers. Individuals with consumer lending problems should contact a lawyer or law firm who specializes in consumer insolvency and bankruptcy in their local area. When in doubt, we suggest you contact your local bar association’s Lawyer Referral Service. [For example, see Bar Association of SF or LA County Bar Association Lawyer Referral Services]

JMBM does not provide legal advice to consumers, and cannot respond to consumer inquiries.