Landlord’s lien waivers deal with more than just the pure statement that a landlord waives its lien rights to, (or subordinates its lien rights against), the rights of a lender or of an equipment lessor. Certainly, those parties have a legitimate concern about the integrity of their collateral and their ability to sell the goods and equipment in place or to remove the collateral for sale elsewhere. For that reason, landlord lien waivers include, among other terms, provisions defining the personal property covered, waiving and subordinating liens, providing for storage or holdover, and dealing with removal.
This is a long one, chock full of sample drafting suggestions. So, set aside more than a few minutes, get the coffee pot brewing, and settle in. If you like it and aren’t yet a subscriber to Ruminations, just click on the right side where it says: “Subscribe here for automatic updates.”
No attempt will be made today to analyze the various types of liens a landlord may have against its tenant’s property other than to say that: (a) in some jurisdictions, there are statutory liens, but they vary greatly from state to state, with some states granting them broadly, some granting them from the get-go, some granting them only after a default, and some limiting them to certain kinds of properties, such as lofts; (b) some liens are consensual, such as those established in a lease through the use of a (UCC) security interest; and (c) some created after a lawsuit, namely a judgment lien.
A basic ABC concept is understanding that “waiving” one’s lien rights is not the same as “subordinating” one’s lien rights. For some reason, the first shot draft of a landlord lien waiver or a landlord’s consent document from a tenant’s lender or equipment lessor (nearly almost) always asks for the landlord to “waive” its lien rights rather than asking that the landlord to (merely) subordinate its lien rights to that of the requesting lender or equipment lessor. There is no (good enough) reason for the lender or equipment lessor to request a waiver rather than a subordination, at least no reason that even comes close to the detriment a landlord can experience in doing so. As will be set forth more fully below, there are valid reasons for a landlord to cooperate with the lender or equipment lessor, letting the lender or equipment lessor get ahead of the landlord in the creditor line. On the other hand, certain facets of insolvency (read that – bankruptcy) law can allow other parties to gain the benefit of a “waiver” even if they weren’t intended to get in line ahead of the landlord. Lenders really understand this. We’ve never had any pushback on replacing “waive” with “subordinate.” In fact, we don’t think you’ll ever see an intercreditor agreement call for the “second in position” to waive its rights in favor of the superior lender. So, lenders know that “subordinate” is “where it’s at.”
In drafting or reviewing a landlord lien waiver, it helps to begin by defining what constitutes the collateral or the tenant’s personal property. Lenders and equipment lessors will want to be over-inclusive, and typically a landlord that has already agreed to facilitate its tenant’s borrowing needs, will have no objection to such an approach. There is one exception, however. A landlord should not allow a lender or equipment lessor to incorporate elements of real property or real property fixtures as part of the defined personal property. This will avoid later arguments, delays, and expenses concerning what is or is not subject to a lender’s lien or what property belongs to an equipment lessor. If there are items of dubious character, a landlord should insist that they be expressly excluded from the lien waiver.
Here are two different personal property (or collateral) descriptions taken from actual lien waivers prepared on behalf of lenders. Each has been annotated in boldface and underlined type to show a possible landlord’s addition. All sample clauses used in this week’s will be similarly annotated. The first is over-inclusive, but that should not be of concern to a landlord. Many of the listed classes of property aren’t subject to a landlord’s lien anyway, and, as will be suggested later, a landlord should not be giving up any rights that it later may earn if it ever becomes a judgment creditor.
[The Collateral includes] [a]ll of the Tenant’s now existing and hereafter acquired or arising personal property, including without limitation accounts, chattel paper, documents, instruments, general intangibles, goods, inventory, equipment, furniture and trade fixtures, and all cash and non-cash proceeds and products (including without limitation insurance proceeds) of the foregoing, and all additions and accessions thereto, substitutions therefor and replacements thereof, but expressly excluding any and all real property fixtures.
The second was also drafted on behalf of a lender. Although the property description is narrower, it still could lead to some confusion and subsequent argument if it were left unchanged.
Landlord acknowledges that Borrower has granted or intends to grant to Lender, pursuant to certain agreements executed by Borrower, a security interest in all of Borrower’s personal property, machinery, equipment, furniture, furnishings and fixtures, but expressly excluding real property and real property fixtures, together with any replacements or renewals thereof or additions thereto serving similar or related functions, located at or used in connection with the Premises (collectively, the “Personality”). Landlord hereby consents to such security interest of Lender and hereby agrees that, so long as Lender has a lien upon all or any portion of the Personality, [the following shall apply].
Regardless of the formulation used in a lender’s or equipment lessor’s form, a landlord would be wise to make sure that the lienable property does not include any real property or real property fixtures. For emphasis, if any specific item of personal property in the leased premises belongs to the landlord, the landlord’s lien waiver should expressly exempt it and all parties should acknowledge the landlord’s ownership interest. Lenders and equipment lessors, on the other hand, would be advised to expressly state that “title to personal property remains with tenant [or equipment lessor, as the case may be] even if the personal property is attached to real property.”
The heart of a landlord’s lien waiver is the language of waiver itself. Here, the task for a landlord [or an equipment lessor when a lender is asking for a lien waiver] is to craft protective language for itself, and the landlord, having already agreed to waive its “landlord liens,” wants to limit the waiver to just those liens, available to it through its status as landlord. Here are two formulations prepared on behalf of lenders.
Landlord waives, as against Lender, and subordinates to the security interest of Lender, all claims, rights of distraint or levy, liens and other rights which Landlord now has or may hereafter acquire with respect to the Personality under the terms of the Lease or under any other agreement entered into with Borrower or under the provisions of applicable law but not any rights Landlord may subsequently acquire as a judgment creditor.
An alternate formulation is:
Any and all liens, claims, demands, or rights, including but not limited to the right to levy or distrain for unpaid rent, which the Landlord now has or hereafter acquires on or in any of the Collateral shall be subordinate and inferior to the lien and security interest of the Bank, and as to the Bank, the Landlord hereby specifically waives and relinquishes all rights of levy, distraint or execution with respect to such property. Notwithstanding the foregoing, Landlord does not waive, relinquish or subordinate any rights or remedies that Landlord may now have, or shall ever enjoy, as a judgment creditor.
An equipment lessor might draft its landlord lien waiver in a manner similar to this clause which is taken from one actually used. In this case, Exhibit “A” would describe the actual leased equipment.
Landlord hereby waives, releases and relinquishes to Equipment Lessor all right, title, interest, claim and lien which Landlord has or may in the future have in, to or against any personal property located at any time on the Leased Premises, including without limitation inventory, shelving, equipment, furniture, machinery, trade fixtures, and books and records and the personal property specifically described on Exhibit “A” attached hereto, to the extent such personal property is now owned or hereafter acquired by Equipment Lessor and leased to Lessee-Tenant or now owned or hereafter acquired by Lessee-Tenant and pledged to Equipment Lessor as collateral security for obligations of Lessee-Tenant to Equipment Lessor (collectively, the “Personal Property”). Personal Property does not include any real property or real property fixtures. Personal Property shall not be subject to levy, sale, or distress or distraint for rent or to any claim, lien or demand of any kind by Landlord, except that Landlord shall retain all liens and shall enjoy all rights and remedies under the Lease or available to it by statute, law or equity but such liens, rights, and remedies are and shall be subordinate to the liens, rights, and remedies of Equipment Lessor. Notwithstanding anything to the contrary in this Lien Waiver, Landlord does not waive, relinquish or subordinate any liens, rights or remedies that Landlord may now have, or shall ever enjoy, as a judgment creditor.
As can be seen in each sample provision, the landlord has subordinated only its lien rights that arise from the landlord-tenant relationship. It has sought to preserve the same judgment creditor rights that any other third party creditor would have against its tenant. Also, the landlord, in each case, is waiving and subordinating its lien rights vis-à-vis the lender or equipment lessor, and not with respect to its tenant or any third party.
Lenders and equipment lessors will want to remove their collateral or leased equipment from the leased premises. To do this, they’ll want both the right to enter and remove their goods and equipment, and the right to have the property remain in the leased premises for a reasonable period of time. With respect to removal of property, a landlord is rightly concerned with possible damage and also that it will not incur the cost of removal if it, itself, can not recover rent arrearages from sale of the removed property.
With respect to removal issues, lenders and equipment lessors will always agree to repair damage caused by removal of the personal property and their proposed lien waivers so provide. Landlords, however, are advised to address the repair of damage caused by the initial installation of equipment and machinery, such as that caused by the use of floor or wall anchors or by specialized utility hook-ups. They should also require lenders and equipment lessors to repair damage caused by the presence of the property to be removed, such as rust stains on masonry walls or oil stains on a floor. To handle this, a landlord can propose the following language: “With respect to property removed by Lender [or Equipment Lessor], Lender [or Equipment Lessor] shall repair all damage caused by the initial installation of, presence of, or removal of such property.” Some landlords adopt a similar provision for inclusion in their tenant leases.
In the alternative, some lenders provide that the landlord may remove the property after the lender abandons it. Landlords are advised to insist that in such cases the lender reimburse them not only for the cost of removal but also for the cost of disposal of the personal property and the repair of the real property. A lender’s clause directed at this arrangement follows, and, as before, it is annotated with a possible landlord comment.
Lender may exercise any remedies available to it with respect to the Personalty, including removal of the Personalty from the Premises, as long as Lender reimburses Landlord for the cost of repair or physical injury, if any, to the Premises arising in the course of removal of, or the initial installation of, or the presence of the Personalty, such reimbursement not to include any diminution of value resulting from the absence of the Personalty removed.
Lenders and equipment lessors need time to deal with the personal property and, therefore, need a reasonable period of time to store their collateral at the leased premises. In some cases, the tenant will still have the right to occupy its space, but often the lease has terminated, whether by reason of default or otherwise. The lender’s or equipment lessor’s ability to enter and remain upon the leased premises is implied by the landlord’s agreement to waive its lien rights. Therefore, the primary issue that remains is one of agreeing upon just how long the property can remain and whether the landlord will receive rent and additional rent once the lender or equipment lessor asserts its right over the property. The following actual formulations are suggestive of possible approaches, but any actual lien waiver provision, of necessity, must conform to the agreement reached between the parties.
The Bank may at any time enter upon the Premises and remove the Collateral. The Bank may also take possession of the Collateral on the Premises, and may remain on the Premises for a period of time not to exceed fifteen (15) days, without charge, in order to dismantle, prepare for disposition or removal, dispose of or otherwise deal with the Collateral. If the Bank stays on the Premises for longer than fifteen (15) days, the Bank shall pay to Landlord a use and occupancy fee equal to the rent and additional rent under the Tenant’s Lease, which Tenant would have paid to Landlord during such additional period, prorated for each day the Bank remains on the Premises.
After Bank has entered the Premises to take possession of the Collateral, Bank, upon ten (10) days’ written notice from Landlord, shall vacate the Premises and its right to remain in the Premises shall be extinguished after such tenth (10th) day, provided, however, that Landlord will permit Lender a total of at least fifteen (15) days to remove the Collateral from the time that Bank first entered the Premises. With respect to any Collateral remaining on the Premises more than ten (10) days after such notice from Landlord to vacate, Landlord, at its sole election, may either deem such Collateral abandoned by Bank and Tenant, or Landlord may move, remove, and/or store the Collateral at the sole cost of Bank.
An actual equipment lessor’s suggested formulation follows, and other than negotiating a change to its business terms, a landlord might find the approach an acceptable one.
If Debtor has vacated the Leased Premises, voluntarily or involuntarily, the Lease is terminated, or Landlord has accelerated all amounts due under the Lease, Landlord may upon sixty (60) days’ prior written notice to Equipment Lessor require Equipment Lessor to remove the Personal Property from the Leased Premises. If Equipment Lessor fails to remove the Personal Property within sixty (60) days after Equipment Lessor’s receipt of the foregoing written notice, Equipment Lessor will pay to Landlord the regular monthly, non-accelerated rental payments under the Lease (not including any past-due, additional or bonus rental) prorated for the number of days Equipment Lessor keeps the Personal Property on the Leased Premises after expiration of such sixty (60) day period. In any event, Equipment Lessor must remove the Personal Property from the Leased Premises within one hundred twenty (120) days after Equipment Lessor’s receipt of the foregoing written notice. Nothing herein or elsewhere shall be deemed to prevent or limit Equipment Lessor, at its option, from abandoning any part of the Personal Property; provided, however, that Equipment Lessor must give Landlord written notice of abandonment in order to be relieved of any obligation to pay rent to Landlord.
Landlords, when reviewing such proposed language, should redefine what constitutes “rent” to include any pass-throughs such as taxes, common area maintenance costs or operating expenses, and insurance. Of course, many landlords will want to reduce the permissible time periods in the equipment lessor’s proposal.
On occasion, the form of lien waiver is initially drafted on behalf of a landlord. Here is a sample, presented without comment, of such a clause dealing with a lender’s or equipment lessor’s right to enter and remain on the leased premises:
The Lessor agrees that upon any breach or default by the Lessee and subject to all rents and charges being current and to prior written notice to the Lessor, the Lender may use and occupy the Premises, but not beyond the end of the stated term of the Lease, for the purpose of keeping, maintaining and storing all, or any portion of, the Goods and foreclosing its security interests therein by selling the same on or within the Premises in one or more public or private sales in accordance with the terms, conditions and covenants of any agreement between the Lessee and the Lender and the New Jersey Uniform Commercial Code during the remainder of the original or any then applicable renewal term of the Lease, provided, however, that for each day that the Lender uses and occupies the Premises pursuant hereto, it shall pay the Lessor an amount equal to the base rent and other monetary items due under the Lease, prorated on a per diem basis.
Although the principal components of a landlord’s lien waiver have already been presented, landlords, lenders, and equipment lessors also may want to address some other issues. Aside from provisions that are generally found in agreements of all kinds, these issues might include: attorneys’ fees, further loans or advances or additions to the list of leased equipment, and the cost of negotiating the lien waiver itself.
Whether to provide for attorneys fees in the event of a dispute over the lien waiver may be a matter of personal preference, but it is unusual to see such a provision in the first draft of a lien waiver. Landlords should be aware of this, and, if they have a preference to include the double-edged attorneys’ fee provision in the waiver, it usually has to be added by way of comment.
Lenders, and by way of extension, equipment lessors, may want to include the following (or in the case of equipment lessors, similar) language in each lien waiver: “Landlord waives notice of additional obligations or extensions or modifications… .”
Lastly, in almost every case, a landlord is accommodating its tenant’s financing needs when it negotiates and delivers a lien waiver. For that reason, it is not inappropriate for a landlord to insist that its tenant sign the lien waiver and that the waiver include a provision substantially similar to: “Borrower shall reimburse Landlord for Landlord’s reasonable attorney’s fees incurred in connection with Landlord’s review and negotiation of this Agreement.”