Resources for Lenders, Community Bankers & Finance Professionals

What Every Landlord Should Know About Landlord Lien Rights

Every lender engaged in commercial financing should be aware of landlord lien rights in their lending area.

 

Landlord's lien is a lien which a landlord has through common law and statute on a tenant's property for the satisfaction of unpaid rent, expenses incurred by the landlord on behalf of the tenant or property damage; the landlord is given the status of a preferred creditor with regard to the tenant's personal property. A landlord's lien usually is superior to a lien filed by a lender under the UCC code. It is critical to obtain a landlord lien waiver (a/k/a Lessor's Agreement, Landlord Waiver, etc., depending on the nomenclature of your bank) on any loans secured by inventory, fixtures and equipment. This preserves the lender's superior position in civil and bankruptcy court.

 

What should be included in the Landlord Lien Waiver?

 

Subordination Clause: Subordinates the landlord's rights to the rights of the lender. Most landlords will object to a blanket waiver of all of their rights, so some negotiation usually occurs.

 

Description: A description of the assets for which the landlord's lien rights are being subordinated. If a specific piece of equipment is being financed, that one piece of equipment should be listed. Broader descriptions of the assets being waived generally benefit the lender, such as all equipment and fixtures. A narrower description benefits the Landlord, such as Kyocera Color Printer serial #1234456.

 

Notification: A notification clause should be included in the landlord waiver which requires the landlord inform the lender of a default. The process of notification (i.e. certified mail) may also be spelled out.

 

Waiver of Lease Payments: The lender should request some period of time in which to remove assets from the leased premises. Otherwise, the lender may be required to pay rent from the moment of default. Thirty days is common for a waiver, though a longer period benefits the lender, particularly with hard to move assets.

 

Insurance: Sophisticated landlords will require the lender to insure the facility and its contents during the period it occupies the facility.

 

Length of Time: Once the waiver of lease payments is finished, it is common for the lender to be provided with some additional time in order to liquidate equipment and other assets on a month to month basis. Rent is usually set at the rate that the tenant paid; however, a different lease payment can also be negotiated.

 

Waiver of Responsibility: The landlord will usually seek a waiver of responsibility for the contents under lien. Hand tools and inventory frequently disappear when a business closes.

 

Property Condition: The landlord usually requires that the property is return to him in its original form. It should be clean and broom swept. Any damages incurred in the liquidation of collateral should be repaired.

 

Comments:

 

The lender should request the landlord lien waiver early in the process after the loan is approved. Large corporate landlords may take several weeks to finalize a waiver. More experienced landlords may have a lien waiver that they use to protect their rights. These waivers may need to be approved by the bank's corporate counsel. Finally, the landlord may be unwilling to sign a waiver.