Get 15 Protections if Tenant Requests Landlord's Lien Waiver

Because tenants often seek financing to help them run their businesses, you probably get several requests from tenants each month for a landlord's lien waiver. Without the lien waiver, a tenant's lender may refuse to go through with the loan, or an equipment lessor may refuse to lease expensive equipment to the tenant. A lien waiver typically states that you agree to waive a valuable right—that is, the right to take possession of the tenant's personal property if it doesn't pay its rent. If you agree to a lien waiver and the tenant defaults on its loan or under its equipment lease, the lender or equipment lessor can take over the tenant's personal property without fear that you'll stop it from doing so or that you'll claim that you have superior rights to that property.

Typically, a tenant will give you its lender's or equipment lessor's form of lien waiver to sign. But you should reject that form because it will probably give you few, if any, protections and could take away important rights that you'll want to keep. Instead, if you agree to sign a lien waiver (or your lease requires you do so), it's better to prepare your own form so that you can protect your interests, advises New Jersey attorney Marc L. Ripp. As we'll explain later, the form you prepare shouldn't be called a landlord's lien waiver, but a “subordination of landlord's lien” or a “lien subordination agreement.”

Below is a checklist of 15 protections to include in the lien subordination agreement. Many of these protections will be missing from a lender's or equipment lessor's form of lien waiver. You can adapt and use our “Model Agreement: Owner-Friendly Lien Subordination Agreement if Tenant Requests Lien Waiver,” which includes these 15 protections.

15 PROTECTIONS FOR LIEN SUBORDINATION AGREEMENT

* Don't Waive Your Lien; Subordinate It

Don't agree to waive your lien on the tenant's personal property, says Ripp. Instead, agree only that you'll “subordinate” (or make secondary) your lien to that of the tenant's lender or equipment lessor [Agr., par. 1]. This way, you'll still have the right to go after the tenant's personal property if it doesn't pay its rent. You'll just have to wait in line behind the tenant's lender or equipment lessor.

* Define ‘Personal Property’ Narrowly

Define the tenant's “personal property” within narrow limits. That is, have the term cover only easily removed personal property (or, in the case of an equipment lessor, the leased equipment)—not fixtures or improvements affixed to the space, says Ripp [Agr., intro.]. Otherwise, if the tenant defaults under its loan agreement, the tenant's lender or equipment lessor could end up ripping out those fixtures, causing severe damage to the space.

* Don't Waive or Subordinate Your Enforcement Rights

Don't waive or subordinate your legal right to enforce a judgment against the tenant, says Ripp [Agr., par. 1]. For instance, if you sue the tenant and win, you should have primary access to the tenant's personal property if it doesn't pay you the awarded damages.

* Give Lender Limited Access to Tenant's Space to Remove Personal Property

If the tenant defaults on its loan agreement or equipment lease, you wouldn't want the lender or equipment lessor entering the tenant's space after business hours, unannounced and unsupervised. So Ripp advises that you give the lender or equipment lessor the right to enter the tenant's space, but only if:

• The entry occurs during business hours;

• The lender or equipment lessor gives you advance written notice; and

• The lender or equipment lessor is accompanied by one of your representatives [Agr., par. 2].

* Make Lender Responsible for Repairing Damage

If the lender or equipment lessor damages the tenant's space while removing the personal property, make it responsible for repairing the damage, says Ripp. You shouldn't have to pay for those repairs. If the lender or equipment lessor doesn't make the repairs, do them yourself, at its expense [Agr., par. 2].

* Condition Subordination on Personal Property's Proper Placement

Agree to subordinate your lien only if the tenant places its personal property in the space in a manner that won't cause any structural or other damage to the space and the building or center, says Ripp [Agr., par. 3]. That should help reduce the risk that the lender or equipment lessor will damage the tenant's space during the property removal process.

* Require Lender to Indemnify You

Require the lender or equipment lessor to indemnify you against any claims arising directly or indirectly from the removal of the tenant's personal property from the space, says Ripp [Agr., par. 4]. That way, the lender or equipment lessor will defend and reimburse you if, for example, a third party is injured during the property removal process and sues you for damages.

* Require Financing Statements' Termination at Lease End

When the lease ends, have the lender or equipment lessor terminate the financing documents it recorded to notify third parties of its lien on the tenant's property, says Ripp [Agr., par. 5].

* Don't Let Lender Record Lien Subordination Agreement

Don't let the lender or equipment lessor publicly record the lien subordination agreement, says Ripp [Agr., par. 5]. Once an agreement is recorded, third parties can find out that you've subordinated your lien, and that could cause you problems if you later apply for a loan. Worse yet, when the lease or the tenant's loan ends, the tenant's lender may drag its feet in removing the lien subordination agreement from the public record.

* Make Lender Pay if Personal Property Isn't Removed by Lease End

If the tenant defaults on its loan, you'll want the lender or equipment lessor to remove the tenant's personal property before the lease ends. If it doesn't finish removing that property in time, make it pay a “use and occupancy” fee, says Ripp. The fee should be equal to the amount of holdover rent then due, he advises [Agr., par. 6].

* Make Tenant Responsible for Holdover Rent, Despite Lender Fee

Even if the lender or equipment lessor ends up paying a fee for not removing the personal property before the lease ends, keep the tenant on the hook for holdover rent, too, says Ripp [Agr., par. 7].

* Get Right to Keep, Discard, or Store Remaining Property

You don't want the tenant's personal property remaining in the space after its lease ends because you may have a new tenant waiting to move into the space. So, if the lender or equipment lessor hasn't removed the tenant's personal property within, for example, five days after the lease ends, have the lender or equipment lessor agree that you may: 1) deem the property abandoned and keep it without paying for it; 2) throw out the remaining property at the lender's or equipment lessor's cost; or 3) store the remaining property at the lender's or equipment lessor's sole risk and cost [Agr., par. 8].

* Make Tenant Pay for Lien Subordination Agreement

Require the tenant to pay your attorney's fees for drafting and negotiating the lien subordination agreement [Agr., par. 9]. You're doing the tenant a favor by subordinating your lien so that it can get financing. You shouldn't also have to foot the bill for the agreement.

* Get Tenant and Lender to Sign Lien Subordination Agreement

Because the lien subordination agreement sets out certain requirements for the tenant and the lender or equipment lessor, you'll want both of them to sign the agreement, says Ripp [Agr., signature page]. Without their signatures, they're not obligated to carry out those requirements.

* Get Guarantor to Confirm Its Obligations

You don't want the tenant's guarantor claiming that by subordinating your lien on the tenant's personal property, you're also reducing the guarantor's liability to you under the guaranty. Instead, require the guarantor to confirm that its obligations under the guaranty will continue and that the lien subordination agreement won't limit or end your protections under the guaranty, says Ripp. Then have the guarantor sign the lien subordination agreement [Agr., end].

Practical Pointer: Attach a form of the lien subordination agreement to your lease, as an exhibit. This way, the tenant will know that it has to use your form if it needs a lien waiver.

Insider Source

Marc. L. Ripp, Esq.: Sr. Assoc. General Counsel, Mack-Cali Realty Corp., Mack-Cali Centre II, 650 From Rd., Ste. 220, Paramus, NJ 07652-3517; (201) 967-0324; mripp@mack-cali.com.

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