Landlord Subordination Agreements: Short is not always sweet.
11/2/2016 | Articles & Alerts
We have all heard the cliché, “keep it short and sweet,” and while it may apply to greeting cards and goodbyes, when it comes to landlord subordination agreements, short is not always sweet.
Landlords are often asked to sign subordination agreements, or “landlord waivers,” by tenants and their lenders. Typically, lenders request these agreements to ensure that the lender’s security interest in a tenant’s property, such as furniture, equipment, or inventory, is protected and superior to any interest a landlord might have in that same property.
Sometimes a tenant will send a landlord a short agreement that it has already signed, with a note that says “My lender asked that we sign this short agreement. Can you please execute?” The agreements generally are short for a reason: they include only the provisions the lender needs to protect its, not the landlord’s, interests. The terms of the agreements, however, are negotiable even if your tenant has already executed the agreement. You should not hesitate to inform the tenant that the terms must be negotiated.
Typically, the lender will ask the landlord to (i) subordinate or even waive any interest you have in the tenant’s property, and (ii) allow the lender to enter onto the tenant’s premises (even after the lease expires or is terminated) to remove any property in which the lender has an interest. The latter is known as non-disturbance and attornment.
From a landlord’s perspective, the three most important concepts to include in these agreements in order to protect the landlord’s interests are provisions regarding: (i) subordination; (ii) lender’s abandonment of the property; and (iii) rent, discussed below.
– Do not agree to waive any interest you have in the tenant’s property. Instead, subordinate your interest to the lender’s interest. By subordinating your interest in the property rather than waiving it, you permit the lender to exercise its rights with respect to the property before you exercise yours, but you maintain your rights therein.
– Limit the period during which a lender is permitted to enter the tenant’s premises after the term of the lease ends. Generally, lenders are limited to forty-five or sixty days after a lease ends to enter the premises to remove any property in which it has an interest. During this period you will be unable to remove the tenant’s property. Therefore you will be unable to re-lease the space. Consider including language that states if the lender fails to remove any property by a given date, the lender will be deemed to have abandoned such property. This will provide you with certainty as to when the lender must remove such property.
– Finally, make sure the agreement requires that the lender pays you rent, including basic rent and additional rent, otherwise due from the tenant under its lease, for any time that you are not able to re-lease the space because of the presence of the tenant’s property. Without such a provision, you may be left with otherwise rentable space which you cannot lease. Therefore, you would be required to pay expenses and taxes otherwise payable by the tenant, until the lender removes the collateral.
When considering the terms of a landlord subordination agreement, remember that the shorter the agreement you receive from a lender, the less likely it will protect your interests as landlord, and the more likely you will be crying all the way to the bank (or other lender).