Lien Waiver, Access Clause in a Lease Can Be Crucial

One pro-tenant clause that is often overlooked when developing lease strategies is a lien waiver and access agreement provision, which addresses the various waivers, consents and access rights required by asset-based lenders from landlords when making loans secured by collateral located in the borrower's leased space. This two-part series discusses the groundwork for the provision and its contents. The conclusion will address the major issues to be covered.

The strategic plans developed by most companies contemplate borrowing funds to finance the operation and expansion of their businesses. Loan facilities extended by asset-based lenders, whether term or revolving loans, or both, will be secured by collateral, much of which may be located in the borrower's leased space. When considering whether to extend a loan facility, underwriters will scrutinize the type, value and location of the collateral for the loans, the ability to receive first priority perfected security interests in the collateral, and the ability to foreclose on and otherwise realize proceeds from the collateral ' in addition to analyzing the financial strength and prospects of the borrower.

Collateral that is located in space leased by a borrower presents additional concerns, hurdles and issues for lenders. Under provisions in leases or state law, landlords may have ownership interests in, or liens on, such collateral that can invalidate or subordinate security interests granted by a borrower to a lender. In addition, lenders need to make arrangements with landlords in order to gain access to such collateral which, although located within leased space, is ultimately situated in the buildings and on the land owned by the landlords.

Laying the Groundwork

Asset-based lenders typically have lien waiver and access agreements addressing those additional concerns that they will require a borrower, as a condition precedent to closing a loan facility, to have executed and delivered by their landlords. Tenants can facilitate the financing component of their strategic plans by including a lien waiver and access agreement provision in their leases that anticipates those additional concerns, and requires the landlords to address and resolve them with the lenders when tenants enter into loan facilities.

By including a lien waiver and access provision in each lease, tenants can enable efficient and productive negotiations between their landlords and lender that should lead to the execution and delivery by the landlords of lien waiver and access agreements that are required by, and acceptable to, the lender.

The provision lays the groundwork for a future request for a lien waiver and access agreement. It educates landlords about the typical concerns and requirements of lenders regarding loan collateral that is located in leased space. In addition, specific problems the landlords may have can be resolved in advance. Finally, at the time the leases are being negotiated, it will be easier for tenants to negotiate with landlords for the typical concessions required by lenders, rather than requesting the concessions from landlords at the time of future financing, when negotiating strength will be negligible, and landlords may be able to extract concessions from tenants.

Contents of the Provision

Typically, the lien waiver and access agreement lease provision will be put to use by a tenant in the future, since there is not usually a loan facility and lease being entered into concurrently. Therefore, the content of the provision must be developed by anticipating the typical waivers, consents and access rights regarding leased space, and the collateral located in such space, which will be required by asset-based lenders at the time of future financings.

In order to ensure a first priority security interest in the collateral, maximize and preserve the value of the collateral and enable the lender, if need be, to pursue its rights and remedies and convert such collateral to proceeds, the lender will want to address the following issues with the borrower's landlords:

• waivers of statutory liens in the collateral that may be granted to landlords under state law to secure the tenant's obligations under the leases;
• waivers of security interests or other liens granted by the tenant to landlords under the leases or other instruments;
• waivers of provisions in the leases prohibiting the tenant from granting a security interest to the lender in the collateral;
• landlord's consent to the tenant's grant to the lender of a security interest in the collateral; and
• rights for access to, and occupancy of, the leased space so that the lender can inspect, repair, preserve, assemble, remove, sell or otherwise deal with or realize the value of the collateral.

There are two alternative approaches for crafting such a lease provision: first, requiring the landlord to enter into an agreement substantially in the form attached to the lease; and second, addressing in detail specific lender issues within the provision itself and requiring the landlord to enter into a lien waiver and access agreement presented by a lender covering those issues.

In addition to covering the material lender issues, whichever approach is used needs to provide flexibility to deal with additional issues that may be raised by lenders in the future, and take into consideration material issues that are raised by landlords and are regularly conceded to by lenders.

The conclusion of this series will discuss the major issues that should be covered in the lease provision, whichever approach is used, and contemplates the concerns of both the tenant (anticipating its lender's issues) and the landlord.

Part One of a Two-Part Series

Although the primary purpose of real estate leases is to rent space, tenants should take the time to develop and implement lease strategies that facilitate their operational methods and strategic plans.

Savvy tenants develop issues checklists or leasing protocols that articulate those lease strategies. By applying those protocols to each lease negotiation, tenants can attempt to create, depending on their negotiating success, some degree of uniformity among typical lease provisions, and provide for the inclusion of pro-tenant clauses throughout their lease portfolio that support their day-to-day operations and strategic plans.

One pro-tenant clause that is often overlooked when developing lease strategies is a lien waiver and access agreement provision, which addresses the various waivers, consents and access rights required by asset-based lenders from landlords when making loans secured by collateral located in the borrower's leased space. This two-part series discusses the groundwork for the provision and its contents. The conclusion will address the major issues to be covered.

The strategic plans developed by most companies contemplate borrowing funds to finance the operation and expansion of their businesses. Loan facilities extended by asset-based lenders, whether term or revolving loans, or both, will be secured by collateral, much of which may be located in the borrower's leased space. When considering whether to extend a loan facility, underwriters will scrutinize the type, value and location of the collateral for the loans, the ability to receive first priority perfected security interests in the collateral, and the ability to foreclose on and otherwise realize proceeds from the collateral ' in addition to analyzing the financial strength and prospects of the borrower.

Collateral that is located in space leased by a borrower presents additional concerns, hurdles and issues for lenders. Under provisions in leases or state law, landlords may have ownership interests in, or liens on, such collateral that can invalidate or subordinate security interests granted by a borrower to a lender. In addition, lenders need to make arrangements with landlords in order to gain access to such collateral which, although located within leased space, is ultimately situated in the buildings and on the land owned by the landlords.

Laying the Groundwork

Asset-based lenders typically have lien waiver and access agreements addressing those additional concerns that they will require a borrower, as a condition precedent to closing a loan facility, to have executed and delivered by their landlords. Tenants can facilitate the financing component of their strategic plans by including a lien waiver and access agreement provision in their leases that anticipates those additional concerns, and requires the landlords to address and resolve them with the lenders when tenants enter into loan facilities.

By including a lien waiver and access provision in each lease, tenants can enable efficient and productive negotiations between their landlords and lender that should lead to the execution and delivery by the landlords of lien waiver and access agreements that are required by, and acceptable to, the lender.

The provision lays the groundwork for a future request for a lien waiver and access agreement. It educates landlords about the typical concerns and requirements of lenders regarding loan collateral that is located in leased space. In addition, specific problems the landlords may have can be resolved in advance. Finally, at the time the leases are being negotiated, it will be easier for tenants to negotiate with landlords for the typical concessions required by lenders, rather than requesting the concessions from landlords at the time of future financing, when negotiating strength will be negligible, and landlords may be able to extract concessions from tenants.

Contents of the Provision

Typically, the lien waiver and access agreement lease provision will be put to use by a tenant in the future, since there is not usually a loan facility and lease being entered into concurrently. Therefore, the content of the provision must be developed by anticipating the typical waivers, consents and access rights regarding leased space, and the collateral located in such space, which will be required by asset-based lenders at the time of future financings.

In order to ensure a first priority security interest in the collateral, maximize and preserve the value of the collateral and enable the lender, if need be, to pursue its rights and remedies and convert such collateral to proceeds, the lender will want to address the following issues with the borrower's landlords:

• waivers of statutory liens in the collateral that may be granted to landlords under state law to secure the tenant's obligations under the leases;
• waivers of security interests or other liens granted by the tenant to landlords under the leases or other instruments;
• waivers of provisions in the leases prohibiting the tenant from granting a security interest to the lender in the collateral;
• landlord's consent to the tenant's grant to the lender of a security interest in the collateral; and
• rights for access to, and occupancy of, the leased space so that the lender can inspect, repair, preserve, assemble, remove, sell or otherwise deal with or realize the value of the collateral.

There are two alternative approaches for crafting such a lease provision: first, requiring the landlord to enter into an agreement substantially in the form attached to the lease; and second, addressing in detail specific lender issues within the provision itself and requiring the landlord to enter into a lien waiver and access agreement presented by a lender covering those issues.

In addition to covering the material lender issues, whichever approach is used needs to provide flexibility to deal with additional issues that may be raised by lenders in the future, and take into consideration material issues that are raised by landlords and are regularly conceded to by lenders.

The conclusion of this series will discuss the major issues that should be covered in the lease provision, whichever approach is used, and contemplates the concerns of both the tenant (anticipating its lender's issues) and the landlord.