Negotiating Lien Waivers so Tenant Can Secure Financing

By Marc Leonard Ripp, Esq.

A tenant asked my owner-client to waive its valuable personal property liens under the lease. The liens entitled the owner to legally seize and sell the personal property of the tenant if it ever failed to pay rent. The tenant requested the lien waiver so it could obtain outside financing to expand its operations. As a condition to making the loan, the tenant's lender was requiring that its lien on the tenant's personal property be paramount to the owner's.

To facilitate a prompt loan closing and meet the demands of its lender, the tenant asked the owner to waive the following important rights:

• The security interest in the tenant's personal property, which I had secured for the owner by filing a financing statement under Article 9 of the New Jersey Uniform Commercial Code when the lease was originally signed;

• The statutory remedy known as “distraint,” which allows commercial owners in New Jersey to seize possession of a tenant's property for the purpose of satisfying a rental delinquency; and

• The statutory liens that grant commercial owners in New Jersey a lien on the tenant's property to ensure the payment of rent.

In the spirit of cultivating a positive business relationship with the tenant, the owner sought to assist the tenant in its efforts to borrow money. However, in offering its cooperation, the owner in no way wanted to compromise its strong position of financial security.

Negotiating a Win-Win-Win Solution

To balance the competing interests of the owner, the lender, and the tenant in an equitable manner that satisfied their respective needs, without undermining the owner's legitimate security concerns, I developed and executed the following 12-step action plan:

1. Appraise the value of the tenant's personal property on which the owner had a prior lien;

2. Estimate the transaction costs of selling the personal property on which the owner had a prior lien;

3. Require a cash security deposit from the tenant equal to the appraised value of the tenant's liened personal property less the estimated transaction costs of selling the property;

4. Instruct the tenant to sign an agreement that subordinates the owner's lien to the lender's lien;

5. Describe specifically those particular items of personal property on which the owner's lien would be subordinated to the lender's lien;

6. Grant the lender limited access rights to remove the property;

7. Obligate the lender to repair any damage that the installation and/or removal of the property may cause;

8. Compel the lender to indemnify the owner from any liability or costs arising from the lender's removal of the property;

9. Mandate that the tenant pay the owner's legal fees in drafting, negotiating, finalizing, executing, and processing the lien subordination agreement;

10. Require the lender to pay the owner a stiff use-and-occupancy charge for each day the personal property remains in the premises after the lease's expiration date;

11. Allow the owner to either keep (free of the lender's lien) or discard (at the tenant's expense) any personal property that remains in the premises after the lease expiration date; and

12. Obligate the lender to pay the owner any legal fees it incurs in seeking to enforce the lien subordination agreement.

I successfully negotiated a comprehensive subordination agreement that accomplished these 12 critical objectives. The lender obtained lien rights on the property superior to those held by the owner. The tenant was able to close the loan it needed to expand its business. The owner collected from the tenant cash security equal to the value of the subordinated lien. In fact, the owner preferred cash to a lien because cash earns interest income for the owner and is administratively easy to manage.

In addition, the owner minimized its exposure by imposing protective contractual terms and conditions that effectively preserved the integrity of the real estate and safeguarded the owner against any liability that might arise as a consequence of the subordination.

Creative legal work helped the owner earn goodwill from its tenant while actually enhancing the owner's security under the lease.

Marc Leonard Ripp is Senior Associate General Counsel at Mack-Cali Realty Corporation in Edison, N.J., and a member of the CLLI Board of Advisors.