SBA requires landlord waivers whenever SBA loans are secured with business personal property which is located at a leased location.  Lenders often ask us for guidelines as to when and where landlord waivers may be waived. Unfortunately, there is no easy answer to this question because the law in this area is extraordinarily complex and differs drastically from state to state.

Since this area of law is so diverse among the states, it is necessary for lenders to have a strategy of how to approach the issue of obtaining a landlord waiver. Some states recognize statutory landlord liens that allow a landlord to seize property of its tenant for unpaid rent. In these states, landlord liens can (but don't always) have priority over other liens and security interests, even including a lender's interest in collateral. In some cases, the landlord's rights are very strong and will trump a lender's rights even if the lender's interest is prior in time to the landlord's interest. Conversely, in other states, the landlord's rights are limited significantly by the timing of the landlord's levy on the collateral. In still other states, a lender's ability to trump a landlord lien may be dependent upon whether the lender has a purchase money security interest or not.

Regardless of whether or not a state recognizes landlord liens, it is always advisable to obtain a landlord waiver because it puts the landlord on notice of the lender's security interest in the collateral. However, as these documents tend to be highly contested, the lender should begin negotiating the landlord waiver as early as possible. If the borrower has not yet signed a lease, the borrower should get the landlord's waiver signed contemporaneously with the lease if possible. Also, because landlord lien laws are very closely tied to UCC laws in many states, it is always a good idea to perfect the lender's security interest as early as possible by pre-filing UCC financing statements.

In drafting or negotiating a landlord waiver, there are three provisions that are always required by the SBA. First, the landlord must subordinate or waive its interest in the bank's collateral. Second, the landlord must notify the lender if there has been a default under the lease by the tenant. Along with notice, the landlord should provide the lender with a reasonable opportunity to cure the default. Finally, the landlord must provide the lender with access to the premises to allow the lender to liquidate the collateral. In addition to the above provisions, if there are substantial leasehold improvements financed with the loan, the landlord should also consent to a collateral assignment of the lease to the lender in this document.

Some landlords simply will not agree to sign a landlord's waiver or will not agree to certain terms. If that is the case, the lender needs to decide whether it can proceed without the waiver, or without some of the required provisions. The lender first needs to make a business decision about how significant the collateral is to the loan. If the collateral in question is very minor, the lender may choose to take a risk and move forward without the waiver. However, doing this means that the lender's security interest may not have priority. If the collateral is significant to the loan, the lender may want to have counsel review the matter to determine whether the landlord has rights that will trump its security interest. Either way, whenever moving forward without a landlord waiver, or with a landlord waiver that does not contain all of the provisions listed above, be sure to thoroughly document all credit decisions to avoid second-guessing by SBA in a guaranty purchase situation.

For more information on landlord waivers and how lenders can protect their liens, contact the author at 215-542-7070, or jconn@starfieldsmith.com.