Landlords who enter into commercial leases with tenants accept, and expect in return, some degree of liability as spelled out in leases and commercial tenancy legislation. After all, leases are intended to be two-way streets: the landlord provides the tenant with a leasehold interest in real property, and the tenant pays rent in return. Understandably, landlords are in no rush to assume additional liability to any third-party lender of the tenant.
For many commercial tenants, however, business viability is dependent on obtaining financing. Tenants often require financing to fund the initial fit-out of their leased premises, and without financing they may be unable to open for business. In such situations, a tenant’s lender may require a security interest in the tenant’s trade fixtures and personal property located within the leased premises as a condition of advancing funds. Consequently, the lender often also requires the landlord to enter into a separate agreement with the tenant’s lender.
Such agreements typically set out a number of standard consent provisions, such as:
- the landlord waives any right to seize the tenant’s property for which the lender has a security interest;
- the landlord allows the lender to enter the leased premises to seize the tenant’s property; and
- the landlord provides the lender with notice when the tenant has defaulted under the terms of the lease.
Financing may be unavailable without this separate agreement between the landlord and tenant’s lender, and while it is ultimately a business decision whether or not the landlord agrees to enter into such an agreement, the landlord’s refusal could result in a deal going south.
While entering into agreements with third-party lenders may be a necessary burden for landlords in the business of commercial leasing, landlords should ensure that they engage legal counsel to review the agreement and make any revisions necessary to ensure lenders do not obtain rights that are unnecessarily detrimental to their interests, for example:
- The lender may ask that the landlord provide them with written notice if there is any amendment to the terms of the lease, or if the tenant is in default under the terms of the lease. A landlord should proceed with caution when presented with such a provision, and instead may consider agreeing only to use commercially reasonable efforts to provide the lender with notice of any amendment or default. The landlord should also ensure that this provision unequivocally specifies that the landlord will have no liability to the lender should the landlord fail to provide notice.
- The lender may require entry onto and possibly possession of the leased premises in connection with removing any tenant property over which they have taken security. In this case, the landlord should require that the lender:
a. promptly repair, or, at the landlord’s option, reimburse the landlord for any damage caused by the lender to the leased premises (or any adjacent premises owned by the landlord);
b. follow all reasonable directions of the landlord to minimize disruption and maximize safety during the removal;
c. pay all arrears of rent and continuing rent obligations on taking possession of the property; and
d. not conduct any public auction or private sale on the landlord’s premises.
3. The agreement with the lender should also specify that the landlord is not the lender’s agent and owes no duty of care to the lender with respect to protecting the lender’s interest in the tenant’s property located in the leased premises. Additionally, the landlord should insist that the lender indemnify the landlord against all claims arising from such interest.