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Timothy D'Lauro, Esq. |
One of the most troublesome issues lenders face is whether they must obtain a Landlord's Waiver, especially when third party landlords are uncooperative or when the personal property collateral has marginal value. Since Landlord's Waivers are a frequent requirement in the making of SBA loans, lenders must understand what the SBA means by a Landlord's Waiver, and when a lender is required to obtain one.
The elements of a Landlord's Waiver are most precisely set forth in the following optional requirements from the National Authorization 7(a) Boilerplate:
"Lender must obtain a written agreement from all Lessors (including sublessors) agreeing to: (1) Subordinate to Lender Lessor's interest, if any, in this property; (2) Provide Lender written notice of default and reasonable opportunity to cure the default; and (3) Allow Lender the right to take possession and dispose of or remove the collateral."
Thus, if a Landlord's Waiver is required, it must include provisions whereby the landlord agrees to subordinate to the lender its interest in the subject collateral located on the leased property; notify the lender of the borrower's default and allow an opportunity to cure; and permit the lender to enter onto the leased property and to remove and dispose of the collateral.
SOP 50 10 5(D) identifies several circumstances when a Landlord's Waiver should be obtained. "When a substantial portion of the loan proceeds are to be used for leasehold improvements or a substantial portion of the collateral consists of leasehold improvements, fixtures, machinery, or equipment that is attached to leased real estate, the lender should obtain ... [an] Assignment of Lease ...; and [a] Landlord's Waiver." (SOP 50 10 5(D) at page 208) (emphasis added). The SOP provides further guidance: "[t]he Landlord's Waiver ... should be obtained for all SBA loans with tangible personal property as collateral." (SOP 50 10 5(D) at page 208).
Accordingly, there are two identified circumstances when a lender should use its best efforts to obtain a Landlord's Waiver: (1) when the lender is financing the making of, or its collateral is substantially comprised of, leasehold improvements, fixtures, machinery or equipment that are or are to be attached to leased real estate, or (2) when the lender is financing SBA loans with tangible personal property collateral. Not surprisingly, because lenders making SBA-guaranteed loans are required to take security interests in "all available collateral," prudent lending suggests lenders should attempt to obtain a Landlord's Waiver when making SBA-guaranteed loans made to borrowers who operate or otherwise have collateral located on leased property.
Obtaining a Landlord's Waiver in an EPC-OC loan (i.e., when the landlord and tenant are borrowers or guarantors) is rarely controversial. However, Lenders frequently find that obtaining a Landlord's Waiver from a third-party landlord presents a significant challenge. Such landlords may refuse to subordinate their rights or obligate themselves to provide notice of default; insist on limiting the lender's access to the leased premises; require broad indemnification from the lender; provide only a brief window for the removal of collateral; or otherwise object to the terms and provisions of a landlord's waiver that addresses the SBA's requirements.
Generally, the prudent lender should view the SBA's suggestion as an imperative, as the failure to obtain the required waiver may result in a repair or denial of the SBA guarantee if the absence of the waiver - and the rights it provides to the lender - prevents the lender from liquidating its collateral, and the lender suffers a loss as a result. If the landlord is unwilling to agree to the necessary provisions, the lender should decline the loan; or move forward by obtaining the SBA's approval to waive the requirement (for loans submitted through standard processing); or make a credit decision to omit the Landlord's Waiver entirely.
Any such justification is critical. For example, if the value of the collateral is substantial and the landlord will not cooperate, the lender may not continue to process the loan without jeopardizing the SBA loan guaranty. If, however, the loan is processed through a lender's delegated authorty, the lender must establish that the liquidation value of the collateral is de minimus; the bank has been unsuccessful in obtaining the waiver; and the lender is nevertheless proceeding with the loan since the cost of the recovery would likely exceed the liquidation value of the collateral. The documentation must be performed contemporarously with the Lender's decision so that, in the event of the event of a default and guaranty purchase submission, the Lender may make a credible argument to the SBA.