Issues Requiring Attention in Lien Waiver, Access Clause

Part Two of a Two-Part Series

The first part of this article described the contents of the lien waiver and access agreement provision required by asset-based lenders. The conclusion discusses the major issues to be covered in the provision.

Major Issues to Be Covered

First and foremost, the landlord should be required to waive any security interests or other liens in the collateral to secure the tenant's obligations under the lease. Those security interests and liens may be granted under the lease or other instruments, or, in some states, promulgated by statute in favor of landlords.

Secured lenders typically do not want any other security interests in or liens on the collateral securing their loans. However, a sophisticated landlord will not waive its liens and will only subordinate them to the lender's security interests in the collateral.

By subordinating its lien, the landlord retains its interest in the collateral subject to the security interests of the lender, but superior to the interests of all subsequent secured creditors and all unsecured creditors of the tenant. Lien subordination in lieu of waiver should be acceptable to a lender, provided that the landlord also agrees not to exercise any of its remedies against the collateral until the loan facility has been fully repaid.

Corollary to the lien waiver/subordination issue, the landlord should waive any prohibition under the lease against, and consent to, the grant of the security interests in the collateral to the lender. Lenders will want to be sure that the grant of security interests under the loan instruments does not create a tenant default under the lease.

A default under a lease for a manufacturing, warehouse or other facility that is critical to the borrower's operations could ultimately lead to business disruptions that might affect the borrower's ability to pay the loan facility. Similarly, the landlord should consent to the security interests granted to the lender in the collateral so that there is clarity on the identification of the collateral and the lender's interest therein.

The lease provision should define the scope of the collateral. The tenant wants as broad a definition as possible to give maximum flexibility to its lender. Ideally, the tenant wants a generic description that makes reference to the collateral for any future loan facilities.

The landlord, on the other hand, wants to exclude property from the collateral which: 1) is or becomes a fixture in connection with the building, 2) is used primarily for the operation of the building (as opposed to the tenant's business), 3) is to remain in the space pursuant to the provisions of the lease at the end of the term, or 4) is otherwise owned by the landlord. The landlord needs to make sure that such property does not become collateral and subject to the lender's remedies, which if exercised could result in the landlord's loss of its property and the diminution of its building and building systems. In addition, such an inadvertent collateral pledge may create a default under the landlord's mortgage.

The definition of collateral can be resolved either by a generic description of the collateral to be granted by the borrower under the loan facility with an exclusion for the landlord's property exceptions, or by a list of items, such as tenant's “raw materials, work-in-progress, finished goods, goods, inventory, equipment and machinery in connection with the operation of the tenant's business, furniture, trade fixtures, books, records, documents, instruments, intangible property, software, and personal property.”

The landlord should allow the lender to have access to, and in certain cases the right to occupy, the leased space to exercise its rights with respect to the collateral under the loan instruments and at law. While the loan facility is performing, a lender will need to inspect and appraise collateral periodically. When the loan facility is in default, a lender must be able to repair, preserve, assemble, remove, sell and otherwise deal with or realize the value of the collateral. The collateral has no value to a lender if a landlord will not allow it to have access to the collateral and the right to occupy the leased space so that it can take the actions necessary to foreclose and prepare the collateral for sale to pay down a loan facility that is in default.

Landlords will be most concerned about limiting the time period during which the lender can occupy the leased space to deal with the collateral. Generally, landlords prefer 30- to 60-day periods, while lenders would like up to 120 days. The landlord will insist on limiting the occupancy period since the tenant will probably also be in default under the lease, and the landlord will be interested in re-letting the space as soon as possible to a viable tenant.

For the same and other reasons, the landlord will want to limit the lender's activities during occupancy of the space to removal of the collateral. Repair, preservation, assembly and sale of the collateral typically are tasks which take longer, and the landlord will not want them taking place on its property because they may disrupt other tenants' businesses or detract from the landlord's ability to market the space.

The landlord will also insist that the lender pay all rent and additional rent under the lease during its period of occupancy. A landlord would be unreasonable to require the lender to pay all past due rent or assume all tenant lease obligations during occupancy. The issues associated with access and occupancy rights will be most intensely negotiated by the tenant and the landlord.

Finally, an experienced landlord will insist on a clause that requires the lender to: 1) repair all damage to the leased space or other portions of the landlord's property arising out of the lender's conduct of its tasks and other activities regarding the collateral, 2) indemnify and defend the landlord against such physical damages and all other damages, costs, expenses and claims arising out of the lender's occupancy of, and activities at, the leased space, and 3) name the landlord as an additional insured under the lender's liability policy with respect to occurrences at or involving the leased space. Such landlord requirements should be acceptable in concept to lenders.

The key to preparing and negotiating a lien waiver and access agreement lease provision is to include enough specifics to provide a template that enables an efficient negotiation between the landlord and the lender on the more important issues, while preserving flexibility for unanticipated issues or developments in practice or under law. Ultimately, the tenant's goal by including such a provision in its leases is to bring the landlords to the negotiating table with a good faith obligation to negotiate, execute and deliver a lien waiver and access agreement to the lender.

Part Two of a Two-Part Series

The first part of this article described the contents of the lien waiver and access agreement provision required by asset-based lenders. The conclusion discusses the major issues to be covered in the provision.

Major Issues to Be Covered

First and foremost, the landlord should be required to waive any security interests or other liens in the collateral to secure the tenant's obligations under the lease. Those security interests and liens may be granted under the lease or other instruments, or, in some states, promulgated by statute in favor of landlords.

Secured lenders typically do not want any other security interests in or liens on the collateral securing their loans. However, a sophisticated landlord will not waive its liens and will only subordinate them to the lender's security interests in the collateral.

By subordinating its lien, the landlord retains its interest in the collateral subject to the security interests of the lender, but superior to the interests of all subsequent secured creditors and all unsecured creditors of the tenant. Lien subordination in lieu of waiver should be acceptable to a lender, provided that the landlord also agrees not to exercise any of its remedies against the collateral until the loan facility has been fully repaid.

Corollary to the lien waiver/subordination issue, the landlord should waive any prohibition under the lease against, and consent to, the grant of the security interests in the collateral to the lender. Lenders will want to be sure that the grant of security interests under the loan instruments does not create a tenant default under the lease.

A default under a lease for a manufacturing, warehouse or other facility that is critical to the borrower's operations could ultimately lead to business disruptions that might affect the borrower's ability to pay the loan facility. Similarly, the landlord should consent to the security interests granted to the lender in the collateral so that there is clarity on the identification of the collateral and the lender's interest therein.

The lease provision should define the scope of the collateral. The tenant wants as broad a definition as possible to give maximum flexibility to its lender. Ideally, the tenant wants a generic description that makes reference to the collateral for any future loan facilities.

The landlord, on the other hand, wants to exclude property from the collateral which: 1) is or becomes a fixture in connection with the building, 2) is used primarily for the operation of the building (as opposed to the tenant's business), 3) is to remain in the space pursuant to the provisions of the lease at the end of the term, or 4) is otherwise owned by the landlord. The landlord needs to make sure that such property does not become collateral and subject to the lender's remedies, which if exercised could result in the landlord's loss of its property and the diminution of its building and building systems. In addition, such an inadvertent collateral pledge may create a default under the landlord's mortgage.

The definition of collateral can be resolved either by a generic description of the collateral to be granted by the borrower under the loan facility with an exclusion for the landlord's property exceptions, or by a list of items, such as tenant's “raw materials, work-in-progress, finished goods, goods, inventory, equipment and machinery in connection with the operation of the tenant's business, furniture, trade fixtures, books, records, documents, instruments, intangible property, software, and personal property.”

The landlord should allow the lender to have access to, and in certain cases the right to occupy, the leased space to exercise its rights with respect to the collateral under the loan instruments and at law. While the loan facility is performing, a lender will need to inspect and appraise collateral periodically. When the loan facility is in default, a lender must be able to repair, preserve, assemble, remove, sell and otherwise deal with or realize the value of the collateral. The collateral has no value to a lender if a landlord will not allow it to have access to the collateral and the right to occupy the leased space so that it can take the actions necessary to foreclose and prepare the collateral for sale to pay down a loan facility that is in default.

Landlords will be most concerned about limiting the time period during which the lender can occupy the leased space to deal with the collateral. Generally, landlords prefer 30- to 60-day periods, while lenders would like up to 120 days. The landlord will insist on limiting the occupancy period since the tenant will probably also be in default under the lease, and the landlord will be interested in re-letting the space as soon as possible to a viable tenant.

For the same and other reasons, the landlord will want to limit the lender's activities during occupancy of the space to removal of the collateral. Repair, preservation, assembly and sale of the collateral typically are tasks which take longer, and the landlord will not want them taking place on its property because they may disrupt other tenants' businesses or detract from the landlord's ability to market the space.

The landlord will also insist that the lender pay all rent and additional rent under the lease during its period of occupancy. A landlord would be unreasonable to require the lender to pay all past due rent or assume all tenant lease obligations during occupancy. The issues associated with access and occupancy rights will be most intensely negotiated by the tenant and the landlord.

Finally, an experienced landlord will insist on a clause that requires the lender to: 1) repair all damage to the leased space or other portions of the landlord's property arising out of the lender's conduct of its tasks and other activities regarding the collateral, 2) indemnify and defend the landlord against such physical damages and all other damages, costs, expenses and claims arising out of the lender's occupancy of, and activities at, the leased space, and 3) name the landlord as an additional insured under the lender's liability policy with respect to occurrences at or involving the leased space. Such landlord requirements should be acceptable in concept to lenders.

The key to preparing and negotiating a lien waiver and access agreement lease provision is to include enough specifics to provide a template that enables an efficient negotiation between the landlord and the lender on the more important issues, while preserving flexibility for unanticipated issues or developments in practice or under law. Ultimately, the tenant's goal by including such a provision in its leases is to bring the landlords to the negotiating table with a good faith obligation to negotiate, execute and deliver a lien waiver and access agreement to the lender.