Structuring Landlord Lien Waivers and Collateral Access Agreements: Navigating Competing Interests of Tenant's Lender and Landlord

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Presenting a live 90-minute webinar with interactive Q&A Structuring Landlord Lien Waivers and Collateral Access Agreements: Navigating Competing Interests of Tenant's Lender and Landlord TUESDAY, AUGUST 15, 2017 1pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Andrea Campbell Davison, Esq., Shareholder, Bean Kinney & Korman, Arlington, Va. John G. Kelly, Shareholder, Bean Kinney & Korman, Arlington, Va. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

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Structuring Landlord Lien Waivers and Collateral Access Agreements: Navigating Competing Interests of Tenant s Lender and Landlord August 15, 2017

Landlord Liens Three ways that landlords obtain lien or other security interests in tenant's personal property. Consensual security agreement Common law rights of distress or distraint Statutory 6

Consensual Security Interest A landlord may obtain a lien against the tenant s personal property and fixtures through a consensual security interest under Article 9 of the Uniform Commercial Code Written security agreement is required, must include language setting forth the security interest and adequately describing the collateral 7

Consensual Security Interest Landlord must perfect by filing a UCC financing statement in the appropriate state filing office May be filed without the tenant s signature so long as authorized Without financing statement, security interest is unperfected and subordinate to any perfected security interest in same property 8

Enforcement of Consensual SI Landlord may foreclose on the property pursuant to the procedures set forth in the UCC without requirement of filing a court action or exercising other judicial process Significant advantage over common law or statutory rights Caveat: UCC financing statements are only valid for five years 9

Common Law Traditional common law rights of distress and distraint enable a landlord to seize and sell a tenant s personal property located at the premises in order to reimburse the landlord for the amount of unpaid rent and other liability Typically enforced via self-help, without a court order Not a lien, per se 10

Statutory Landlord Liens Given to landlords in about half of the states There is no uniform or model landlord s lien law and reference must be made to the specific statutes in each applicable jurisdiction Virginia Code Sections 55-227 through 55-238 DC Code Sections 42-3213 through 42-3216 Maryland Real Property Code Ann. Sec. 8-302 (no automatic statutory lien, landlord action for distress for rent only) 11

Statutory Landlord Liens Rights differ from state to state as to timing, priority and limitations Typically provide the landlord with a lien on all of the tenant s personal property located within the demised premises as security for the tenant s obligations under the lease Liens replace or supplement the common law remedies of distress and distraint Often limited to a specific amount or period of time 12

Extent Of Landlord Liens Machinery and Equipment Fixtures Inventory Creditor will typically take priority if UCC financing statement is filed before equipment is placed on the property Competing with Purchase Money Security Interests See definition of security interest Va. Code Secs. 8.9-324(a), 8.1A-201(b)(35) 13

Enforcement of Statutory Liens Enforcement is often relatively cumbersome, expensive, time consuming Limited by statute Subject to avoidance in the event of tenant bankruptcy 14

Enforcement of Statutory Liens Virginia, DC and Maryland all require landlord to file a court action and follow very detailed procedures designed to afford the tenant adequate due process prior to losing its property 15

Enforcement in DC Statutory lien terminates three months after the rent owed became due or upon the termination of any action seeking such unpaid rent brought by landlord within that three-month period 16

Enforcement in Virginia Relates back to the commencement of the lease Secures: Not more than six months rent if premises are in a city or town, property used for residential purposes Not more than twelve months rent on land used for farming or agriculture 17

Enforcement in Virginia Superior to any other lien upon the tenant's property located at the premises, except for liens attaching prior to the commencement of the lease term and tax liens Extends to any goods of the lessee (including lessee s assignee or subtenant) either: Found on the premises or Removed from the premises during the preceding 30 days 18

Enforcement in Maryland No statutory lien rights in favor of a landlord, so a landlord would have to pursue an action for distress with the ability to then lien the personal property if successful in obtaining a judgment 19

Bankruptcy 11 U.S.C. sec. 545(3) and (4) Allows the trustee (or debtor in possession) to avoid any liens for rent or distress for rent (seizure of personalty to enforce a rental obligation) Section specifically uses term statutory lien but definition includes all liens for distress for rent whether statutory or not Lease provisions providing for a lien on personalty will generally be ineffective in bankruptcy 20

Bankruptcy Landlord holding perfected UCC security interest will be treated as a secured creditor subject to automatic stay imposed by 11 U.S.C sec. 362 21

Landlord Waiver Agreements The tenant s lenders will want a security interest in the tenant s personal property to secure the repayment of the tenant s loan obligations, creating a conflict between the lien rights of the landlord and the lender As a condition to financing, lenders typically request that the landlord execute waiver SBA loan landlord waiver an absolute requirement 22

Landlord Waiver Agreements Landlords recognize financing as a critical need without which the tenant would not be able to operate its business and generate the revenues needed to pay the rent May push back at a request to a waiver, but will often to agree to at least subordinate their landlord s lien rights to that of the lender s security interest Subordination (rather than waiver) would at least provide secondary secured position and limited recovery in default situation 23

Landlord Waiver Agreements Lenders Perspective: Landlord waiver agreement is typically bank document prepared by lender s counsel Often grants lender favorable rights and places burdensome obligations on landlord Tenant typically is not a key party to the negotiations, may play a referee position 24

Landlord Waiver Agreements Tenant s Perspective include lender s required waiver form as exhibit to lease agreement to save time and expense later Landlord may try to pass on legal fees incurred in negotiation of waiver onto tenant 25

Tips for Landlords Since most landlord waiver/subordination documents start out as one-sided bank forms, the landlord with leverage should request certain changes to protect their rights. 8 Suggested Negotiating Points/Changes 26

Tips for Landlords (#1) Subordinate landlord s lien rather than provide outright waiver Second lien position may be questionable, but leaves some chance of recovery Limit waiver or subordination only to landlord s statutory or common law rights, not all liens (i.e., judgments) Waiver should not terminate tenant s continued liability under lease 27

Tips for Landlords (#2) Retain control over the process of the lender removing the collateral Removal only after business hours and from designated loading areas Lender must pay for any damage caused by removal, indemnify landlord in case of third party claims resulting from entry Landlord must furnish evidence of insurance Lenders will typically agree to repair damage, push back on blanket indemnification 28

Tips for Landlords (#3) Make clear what equipment constitutes collateral Landlord should agree that personal property remains personalty in exchange for lender agreeing not to pursue its security interest in building systems Ensure leasehold interest does not constitute collateral Exclude cash accounts 29

Tips for Landlords (#4) Limit requirement of notice of tenant s default under lease Landlord will want notice and an opportunity to cure on behalf of tenant, but this places administrative burden on landlord Limit to notice of defaults which may result in termination of lease, or of termination itself Keep cure period short and limited to monetary defaults 30

Tips for Landlords (#5) Limit period after termination for removal of collateral Lender will request a time period (typically sixty to ninety days) to take inventory and remove collateral May not be unreasonable, but prevents landlord from re-leasing property Landlord may insist the lender pay rent during such period, important to define starting and expiration point of such obligation 31

Tips for Landlords (#6) Replacement tenants Lender should agree not to interfere with landlord s efforts to re-lease premises Property should remain available for reasonable inspection by landlord 32

Tips for Landlords (#7) Public liquidation sales Landlord should request lender not to hold such sales without landlord prior consent and subject to landlord s reasonable conditions 33

Tips for Landlords (#8) Termination of Agreement Waiver or subordination document should clearly provide that agreement terminates upon tenant s full repayment or satisfaction of loan, particularly as to landlord s obligations 34

John G. Kelly, Esq. (jkelly@beankinney.com) Andrea C. Davison, Esq. (adavison@beankinney.com) Bean, Kinney & Korman, P.C. 2300 Wilson Boulevard, 7 th Floor Arlington, Va. 22201 703-525-4000, extension @beankinney.com www.beankinney.com 35