When Should Lenders Require Landlord’s Waivers?

Landlord's WaiverLandlord’s Waivers are often required by lenders in connection with business loans.

When a substantial portion of loan proceeds are to be used for leasehold improvements or a substantial portion of the loan collateral consists of leasehold improvements, fixtures, machinery or equipment that is attached to the leased real estate, the lender should require a Landlord’s Waiver.

Lenders attempt to avoid or minimize losses if a business defaults on the loan. Landlord’s Waivers allow lenders to enter the property and obtain the collateral securing the loan where a default occurs.

The failure of a lender to obtain a Landlord’s Waiver can be problematic in a commercial loan transaction because it can lead to disagreements between the landlord and the lender over a variety of issues. The result of these disagreements may be minor, such as the landlord may simply require payment of past due rent in exchange for the lender’s access to its collateral. However, the results may also be substantial. For example, the failure to have a Landlord’s Waiver may result in lengthy and costly litigation and/or the lender losing a priority claim in the collateral.

In general, a Landlord’s Waiver should, at a minimum, contain the following provisions:

  • Landlord shall subordinate its interest in the collateral, if any, to lender’s interest;
  • Landlord shall provide lender at least 60 days’ written notice of a default under the lease prior to terminating the lease;
  • Landlord shall provide lender an opportunity to cure the default; and
  • Landlord shall allow lender access to the leased premises to take possession of, and dispose of, the collateral.

Landlord’s Waivers have practical benefits in commercial loan transactions where personal property pledged as collateral is located in leased space. The subordination of the landlord’s interest in the collateral can reduce the potential for disputes between the lender and the landlord if the lender needs to foreclose upon the collateral. Landlord’s Waivers may also clarify that the personal property of the borrower is to be considered personal property, so even if it becomes affixed to the real estate, it will not be deemed a fixture. Additionally, Landlord’s Waivers can allow the lender to take control of not only the collateral, but also the leased premises, which could facilitate a smooth conveyance of the collateral as well as the leased premises to a subsequent tenant, which can be advantageous for both the lender and the landlord.

A Landlord’s Waiver can benefit all interested parties: the lender benefits from additional assurances relative to the collateral securing its loan; the landlord benefits from clear understandings of the parties’ relationships vis-à-vis the collateral, thus reducing the potential of a dispute with the lender; and, a cooperative borrower benefits because the waiver is another attempt to reduce a lender’s risk – making it more likely that the loan will be approved, and, funded.

This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

Wendy M. Reutebuch | Real Estate, Real Estate Finance and Creditors’ Rights

Wendy represents clients in both Illinois and Wisconsin in a wide variety of commercial real estate and real estate finance transactions. In addition to handling acquisitions, dispositions and leases, Wendy also advises lenders on loan transactions, loan workouts, loan restructurings, forbearance and pre-foreclosure matters.  If you need assistance with a related matter, contact Wendy.

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