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How to Fight Subordination of a Leasehold
Landlords are regularly asked to consent to a tenant's financing, secured by the tenant's equipment and other assets. Such consent proposals are typically accompanied by a further request for the landlord to waive or subordinate its interest in the tenant's personal property, if any, in favor of the claim and lien of the tenant's lender. Today, lenders often go so far as to seek the subordination of the landlord's interest in the lease itself to the interest of the lender under the financing. In response, landlords will routinely resist any subordination of the leasehold, and will require various protections such as excluding fixtures from the lender's collateral and providing that if the lender forecloses on, or takes possession of, the collateral, it will do so peaceably and in compliance with applicable legal process, without interference with the operations of the landlord's shopping center or the businesses of other tenants, and with an obligation by the lender to repair any damage to the premises resulting from the removal of the collateral.
The documentation described above is fairly routine. However, what if the tenant's financing is secured not only by the tenant's personal property, but by a mortgage of the tenant's leasehold as well? In this case, the landlord and the lender will grapple with issues such as notice to the lender and a right to cure any tenant default. The lender will often request (and the landlord will typically resist) an additional cure period beyond any such period applicable to the tenant, together with a right to foreclose on the leasehold mortgage and step into the shoes of the tenant, while also attempting to limit or eliminate the lender's responsibility for the sins of the tenant (with the landlord again resisting such efforts).
Now let's take this scenario a step or two farther. What if the tenant's lender takes a security interest in the personal property of the tenant and a mortgage on the leasehold, and the tenant's lease includes a restrictive use clause and an operating covenant? How do the parties work to facilitate the financing, yet protect the legitimate concerns of the landlord? The tenant in such circumstances may conduct a specialized business, critical to the tenant mix in the center, and with unique space and leasehold improvements not readily adaptable to other uses. The landlord may have co-tenancy requirements in other leases dependent upon the subject tenant's compliance with the operating covenant.
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