By signing the subordination agreement with the landlord, your landlord agrees to notify your lender in writing if you default. In addition, they agree to give the lender the opportunity to «remedy» the default or take care of your late payments – an advantage for your landlord as it gives them a chance to receive their rent payments. My most recent article included a brief explanation of the force majeure provisions in commercial leases and how landlords and tenants should carefully review the wording to determine whether the parties` obligations can be excused due to global conditions. You`ll want to subordinate your privilege to the tenant`s property instead of giving it up completely. Lenders generally accept subordination because they focus on obtaining an initial security right. With subordination, the lender gets priority, but your less secure position can still provide reduced collection if the tenant defaults. Sixth, the lender should agree not to interfere with the landlord`s efforts to rent the premises to a replacement tenant and to be available for appropriate inspection by the landlord. Small business owners trying to apply for a loan that requires a landlord`s subordination agreement may find that the process takes longer than expected if their landlord refuses to sign. In these cases, your bank may turn to the SBA or its own commercial underwriting services to waive the requirements of a subordination agreement signed by the owner, but this will result in further delays in obtaining financing.  And in the end, the loan could be completely rejected without the subordination agreement signed by the owner. Business interruption insurance is a loss insurance policy when businesses are unable to operate for reasons beyond their control. Typically, landlords in the context of commercial real estate require tenants to take out this insurance, and landlords usually wear it. In short: The owner «orders» his rights to your warranty in the event that you are in default.
In other words, the lender gets the first dibs. However, your landlord does not completely waive their rights. When drafting your commercial real estate lease, you (or your lawyer) may have had the smart idea of including a provision that grants you, as the owner, a security right in your tenant`s personal property. Despite the explicit wording, you may later be approached by your tenant to sign a waiver of privilege or subordination agreement («Waiver of Privilege/Subordination») in which you waive or subordinate your lien on the tenant`s personal property. Typically, a tenant`s lender will request a pledge waiver or subordination to ensure that the lender`s security right in a tenant`s property, such as furniture, equipment or inventory, is maintained and prevails over the landlord`s security right in the same property. First, the landlord should try to subordinate the landlord`s lien instead of a complete waiver. The actual value of a secondary position may be questionable, but there may be some recovery and it is preferable for the landlord to be a secured creditor in the event of bankruptcy. Waiver or subordination should be limited only to the legal or customary privileges of the landlord and, where applicable, consensual privileges such as UCC security rights, but not to all privileges such as judgment privileges. The waiver shall not result in the termination of the tenant`s additional liability under the rental agreement. Second, the landlord should try to maintain control over the process by which the lender withdraws the security. For example, the lender should withdraw the security only after the offices and designated loading areas have closed.
The lender would also have to agree to pay for any damage caused by the move and is often asked to compensate the landlord for third-party claims arising from the lender`s entry into the premises for these purposes. The landlord could also insist that the lender provide proof of insurance before entering the premises to withdraw the security. Lenders often postpone lump-sum compensation, but usually agree to repair damage caused by the removal of personal property. There are several types of privileges available to landlords over their tenants` personal property, depending on the terms of their leases and applicable state law. Landlords should be very familiar with the privileges of their respective states and design the terms of their leases accordingly. Tenants` lenders will object to the landlord`s broad privileges as they attempt to secure their loans against the same personal property. The resulting conflict is best resolved through equitable submission to the landlord`s lien agreement, which, in order to save time and money, should be attached to the lease as a pre-approved form. Fourth, the lender wants to be notified of the tenant`s default under the lease and a way to heal on behalf of the tenant. This represents an administrative burden on the landlord, so the number and reason for terminations should be limited to terminations that may result in the termination of the lease if possible. As regards the possibility of giving the creditor the opportunity to remedy the tenant`s default, the period should be short and limited only to defaults. Instead, many lenders only accept notices before or in connection with the termination of a lease.
You may be wondering why you voluntarily enter into such a contract, especially if you don`t have a specific rental obligation. As a practical and enterprising landlord, it is imperative that you recognize the importance of your tenant`s financial success. .