Law and Practice
Some tenants need outside financing to run their businesses. Many lenders are willing to make such loans, but only on a secured basis. Other tenants lease expensive equipment. Their equipment lessors want to be sure that no one else lays claim to that equipment while it is in the hands of the tenant. Neither those lenders nor those equipment lessors want a landlord to have first claim to the securing collateral or to the leased equipment.
To deal with this concern, those lending money and leasing equipment to tenants frequently require consents and lien waivers from their customers' landlords. The objective of this article is to provide some practice pointers in preparing effective waivers and in responding to requests for them. By its terms, it will speak only of non-residential tenancies and only of concerns between lenders and landlords, and equipment lessors and landlords. The lien rights and priorities between those pairings are not affected by federal bankruptcy law because bankruptcy law derives its lien priority rules between competing lienholders from applicable state law.
We'll begin by an analysis of the lien or lien-like rights held by landlords, and then look at common landlord lien waiver provisions and issues.
Although uncommon, real property leases can contain express provisions granting the landlord a security interest in a tenant's personal property, even to after acquired property. Such a lease, in effect, serves as a security agreement for the tenant's lease obligations. That security interest can be perfected by following the rules of Article 9 of the New Jersey Uniform Commercial Code, including the filing of financing statements. In addition, New Jersey landlords are beneficiaries of two statutes giving them a "quasi lien" against some of their tenants' property. Landlords also have the special remedies of distraint and distress for arrears of rent. Further, after appropriate proceedings, a landlord can gain the status of a judgment lien creditor just as can any other creditor.
All other considerations aside, both a tenant's landlord and its lender or equipment lessor want to have first call on the tenant's property upon a default. Ideally, none want to be pari pasu with the others.
A landlord's rights arise immediately upon execution of the lease. Commonly, at that point there is neither a lender nor equipment lessor in the picture. Typically, therefore, a landlord's lien rights and remedies are in place when the tenant comes to its landlord for what is commonly referred to as a landlord's lien waiver. Why, then, would a landlord voluntarily give up a right that it may have? Even if this issue were raised by a tenant during lease negotiations, why would a landlord yield on the point?
The answer usually lies in the business interests of a landlord. After all is said and done, landlords prefer successful tenants. Those are tenants that can finance the maintenance and growth of their businesses. Taking loans, whether directly, or by financing devices such as the use of equipment leases, provides a tenant with the ability to sustain and even improve its business. Just as a landlord finances its property, a tenant finances its business. Just as a landlord's lender requires subordination of leases to its mortgage, a tenant's financing source require subordination to its interests. Almost always, where a neutral or healthy relationship exists between a tenant and its landlord, as a business matter, a landlord will grant a landlord's lien waiver.
Just what is it that a landlord is waiving? At common law, a landlord has a right, analogous to a lien, to distrain, for arrears of rent, the non-exempt goods and chattels of its tenant. That remedy is currently codified in N.J.S. 2A:33-1, et seq. Essentially, to distrain is to take possession of the tenant's property as security for the rent. By statute, distraint may not be taken against property interests of others or to cover more than one year's rent arrearage. This does not preclude execution against a tenant's property, but a lender's interest, to extent of its security, remains property of the lender. Leased equipment remains the property of the lessor and is not subject to distraint.
In New Jersey, a landlord, solely by reason of its status as landlord, has two other rights, quasi lien in nature. One arises under the Landlord and Tenant Act, N.J.S. 2A:42-1, et seq. The other arises out of the Loft Act, N.J.S. 2A:44-165, et seq. The landlord lien provided under the Landlord and Tenant Act has been in effect in New Jersey law, nearly unchanged, since 1795. In fact, its wording derives from a 1709 English statute, 8 Anne, ch. 14. Although titled as a "landlord's lien for rent," it actually does not give a landlord a "lien." Instead, it gives a landlord a preferential right to payment out of the sale of its tenant's goods and chattels on the leased premises, over other creditors, even those holding execution. It does not, however, give a preferential right over parties holding a security interest in such property. Further, it is limited to payment of one year's rent.
At most, a landlord's preferential right under the Landlord and Tenant Act is in the nature of an inchoate lien. It becomes an actual lien only under certain specified statutory conditions. Prior to an actual distraint, a tenant can freely dispose of its goods, remove them from the leased premises, and grant security interests in them. By its terms, any creditor seeking to remove a tenant's goods from the leased premises "by virtue of any execution, attachment or other process" is required to pay all outstanding rent (but not exceeding one year's rent). As the courts have explained, the statute's rationale is that prior to a creditor's execution, a landlord could distrain for up to one year's unpaid rent. To protect a landlord from loss of this distraint remedy, it was given this quasi lien. In effect, a landlord's lien under the Landlord and Tenant Act doesn't take effect if there is no taking by a creditor.
The Loft Act is of greater concern to secured lenders other than purchase money lenders. It was passed in 1933 in response to the severe economic conditions of the depression. Its purpose was to give "a lien to owners of mill, factory, loft and other manufacturing space upon the machinery or other chattels of those to whom space has been rented." In a preamble to the Loft Act, the Legislature expressed a desire to protect landlords against unscrupulous manufacturers who placed mortgages on their property to the prejudice of the landlord. At that time, as now, a landlord's "lien" rights under the Landlord and Tenant Act, and a landlord's distraint remedy, could not reach a secured party's interest (by chattel mortgage or otherwise) in a tenant's property. Only by holding an effective chattel mortgage (and especially in after-acquired property), could a landlord get priority over other secured parties. By its terms, the Loft Act creates a lien that "shall have priority and be paramount to any title, lien, interest, mortgage, judgment or other encumbrance created after machinery or other chattels are placed in the premises." [Emphasis added.] Its priority is limited to six months' unpaid rent.
Both the quasi lien under the Landlord and Tenant Act and the quasi lien under the Loft Act have survived constitutional challenges. In the words of one court, "[l]aw is a silent factor in every contract." Essentially, a lender, when making its loan, must be aware that the loan is subject to law. Both quasi liens are co-extensive with a landlord's right of distress, which is the taking of a tenant's goods by a landlord to satisfy a rent obligation that is due and unpaid.
Article 9 of the Uniform Commercial Code does not apply to landlord's liens other than contractual landlord's liens. N.J.S. 12A:9-104(b). This is a specific exclusion that has been held to exclude all non-consensual landlord's liens whether under common law (such as distraint) or by statute, regardless of whether labeled as a "landlord's lien" or not. By reason of their specific exclusion under Article 9, the priority of landlord's liens is governed by pre-Code law, effectively giving them priority over Article 9 security interests.
The confluence of a landlord's distraint remedy and its quasi liens under each of the Landlord and Tenant Act and the Loft Act threatens secured lenders and equipment lessors. Clearly, a non-purchase money lender to a manufacturing tenant will find even its perfected lien will be inferior to a landlord's Loft Act rights. An intentionally or unintentionally unsecured lender will be threatened under every circumstance. By example, an unsecured judgment creditor must satisfy up to one year's rent arrearage before effectuating an execution. What is more, even where a secured lender holds a lien superior to that of its borrower's landlord, the landlord still has physical control over the tenant's personal property, and may have the ability to expose the property to sale with only an accounting to a secured lender. For these reasons alone, lenders and equipment lessors request or require lien waivers from their customer's landlords.
With all of that as background, it is now time to look at some typical issues raised by landlord's lien waivers. Such documents are often prepared to stand on their own, but it is not uncommon to encounter lien waivers integrated with estoppel letters. Whichever drafting approach is taken. The issues relating to a lender's or equipment lessor's interest in a tenant's personal property remain the same.
Landlord's lien waivers deal with more than just the pure statement that a landlord waives its lien rights to, (or subordinates its lien rights against) the rights of a lender or equipment lessor. For example, those parties have a legitimate concern about the integrity of the collateral and their ability to sell the goods and equipment in place or to remove the collateral for sale elsewhere. Consequently, landlord lien waivers include, among other terms, provisions defining the personal property covered, waiving and subordinating liens, providing for storage or holdover, and dealing with removal.
In drafting or reviewing a landlord lien waiver, it is helps to begin it by defining what constitutes the collateral or tenant's personal property. Lenders and equipment lessors will want to be over-inclusive, and typically a landlord that has already agreed to facilitate its tenant's borrowing needs, will have no objection to such an approach. There is one exception, however. A landlord should not allow a lender or equipment lessor to incorporate elements of real property or real property fixtures as part of the defined personal property. This will avoid later arguments, delays, and expenses concerning what is or is not subject to a lender's lien or what property belongs to an equipment lessor. If there are items of dubious character, a landlord should insist that they be expressly excluded from the lien waiver.
Here are two different personal property (or collateral) descriptions taken from actual lien waivers prepared on behalf of lenders. Each has been annotated in boldface and underlined type to show a possible landlord's addition. All sample clauses used in this article will be similarly annotated. The first is over-inclusive, but that should not be of concern to a landlord. Many of the listed classes of property aren't subject to a landlord's lien anyway, and, as will be suggested later, a landlord should not be giving up any rights that it may get upon becoming a judgment creditor.
[The Collateral includes] [a]ll of the Tenant's now existing and hereafter acquired or arising personal property, including without limitation accounts, chattel paper, documents, instruments, general intangibles, goods, inventory, equipment, furniture and trade fixtures, and all cash and non-cash proceeds and products (including without limitation insurance proceeds) of the foregoing, and all additions and accessions thereto, substitutions therefor and replacements thereof, but expressly excluding any and all real property fixtures.
The second was also drafted on behalf of a lender. Although the property description is narrower, it still could lead to some confusion and subsequent argument if it were left unamended.
Landlord acknowledges that Borrower has granted or intends to grant to Lender, pursuant to certain agreements executed by Borrower, a security interest in all of Borrower's personal property, machinery, equipment, furniture, furnishings and fixtures, but expressly excluding real property and real property fixtures, together with any replacements or renewals thereof or additions thereto serving similar or related functions, located at or used in connection with the Premises (collectively, the "Personality"). Landlord hereby consents to such security interest of Lender and hereby agrees that, so long as Lender has a lien upon all or any portion of the Personality, [the following shall apply].
Regardless of the formulation used in a lender's or equipment lessor's form, a landlord would be wise to make sure that the lienable property does not include any real property or real property fixtures. For emphasis, if any specific item of personal property in the leased premises belongs to the landlord, the landlord's lien waiver should expressly exempt it and all parties should acknowledge the landlord's ownership interest. Lenders and equipment lessors, on the other hand, would be advised to expressly state that "title to personal property remains with tenant [or equipment lessor, as the case may be] even if the personal property is attached to real property."
The heart of a landlord's lien waiver is the language of waiver itself. Here, the task for a landlord or equipment lessor is to craft protective language for itself, and the landlord, having already agreed to waive its "landlord liens," wants to limit the waiver to just those liens, available to it through its status as landlord. Here are two formulations prepared on behalf of lenders.
Landlord waives, as against Lender, and subordinates to the security interest of Lender, all claims, rights of distraint or levy, liens and other rights which Landlord now has or may hereafter acquire with respect to the Personality under the terms of the Lease or under any other agreement entered into with Borrower or under the provisions of applicable law but not any rights Landlord may subsequently acquire as a judgment creditor.
An alternate formulation is:
Any and all liens, claims, demands, or rights, including but not limited to the right to levy or distrain for unpaid rent, which the Landlord now has or hereafter acquires on or in any of the Collateral shall be subordinate and inferior to the lien and security interest of the Bank, and as to the Bank, the Landlord hereby specifically waives and relinquishes all rights of levy, distraint or execution with respect to such property. Notwithstanding the foregoing, Landlord does not waive, relinquish or subordinate any rights or remedies that Landlord may now have, or shall ever enjoy, as a judgment creditor.
An equipment lessor might draft its landlord lien waiver in a manner similar to this clause which is taken from one actually used. In this case, Exhibit "A" would describe the actual leased equipment.
Landlord hereby waives, releases and relinquishes to Equipment Lessor all right, title, interest, claim and lien which Landlord has or may in the future have in, to or against any personal property located at any time on the Leased Premises, including without limitation inventory, shelving, equipment, furniture, machinery, trade fixtures, and books and records and the personal property specifically described on Exhibit "A" attached hereto, to the extent such personal property is now owned or hereafter acquired by Equipment Lessor and leased to Lessee-Tenant or now owned or hereafter acquired by Lessee-Tenant and pledged to Equipment Lessor as collateral security for obligations of Lessee-Tenant to Equipment Lessor (collectively, the "Personal Property"). Personal Property does not include any real property or real property fixtures. Personal Property shall not be subject to levy, sale, or distress or distraint for rent or to any claim, lien or demand of any kind by Landlord, except that Landlord shall retain all liens and shall enjoy all rights and remedies under the Lease or available to it by statute, law or equity but such liens, rights, and remedies are and shall be subordinate to the liens, rights, and remedies of Equipment Lessor. Notwithstanding anything to the contrary in this Lien Waiver, Landlord does not waive, relinquish or subordinate any liens, rights or remedies that Landlord may now have, or shall ever enjoy, as a judgment creditor.
As can be seen in each sample provision, the landlord has subordinated only its lien rights that arise from the landlord-tenant relationship. It has sought to preserve the same judgment creditor rights that any other third party creditor would have against its tenant. Also, the landlord, in each case, is waiving and subordinating its lien rights vis-a-vis the lender or equipment lessor, and not with respect to its tenant or any third party.
Lenders and equipment lessors will want to remove their collateral or leased equipment from the leased premises. To do this, they'll want both the right to enter and remove their goods and equipment, and the right to have the property remain in the leased premises for a reasonable period of time. With respect to removal of property, a landlord is rightly concerned with possible damage and also that it will not incur the cost of removal if it, itself, can not recover rent arrearages from sale of the removed property.
With respect to removal issues, lenders and equipment lessors will always agree to repair damage caused by removal of the personal property and their proposed lien waivers so provide. Landlords, however, are advised to address the repair of damage caused by the initial installation of equipment and machinery, such as that caused by the use of floor or wall anchors or by specialized utility hook-ups. They should also require lenders and equipment lessors to repair damage caused by the presence of the property to be removed, such as rust stains on masonry walls or oil stains on a floor. To handle this, a landlord can propose the following language: "With respect to property removed by Lender [or Equipment Lessor], Lender [or Equipment Lessor] shall repair all damage caused by the initial installation of, presence of, or removal of such property." Some landlords adopt a similar provision for inclusion in their tenant leases.
In the alternative, some lenders provide that the landlord may remove the property after the lender abandons it. Landlords are advised to insist that in such cases the lender reimburse them not only for the cost of removal but also for the cost of disposal of the personal property and the repair of the real property. A lender's clause directed at this arrangement follows, and, as before, it is annotated with a possible landlord comment.
Lender may exercise any remedies available to it with respect to the Personality, including removal of the Personality from the Premises, as long as Lender reimburses Landlord for the cost of repair or physical injury, if any, to the Premises arising in the course of removal of, or the initial installation of, or the presence of the Personality, such reimbursement not to include any diminution of value resulting from the absence of the Personality removed.
Lenders and equipment lessors need time to deal with the personal property and, therefore, need a reasonable period of time to store their collateral at the leased premises. In some cases, the tenant will still have the right to occupy its space, but often the lease has terminated, whether by reason of default or otherwise. The lender's or equipment lessor's ability to enter and remain upon the leased premises is implied by the landlord's agreement to waive its lien rights. Therefore, the primary issue that remains is one of agreeing upon just how long the property can remain and whether the landlord will receive rent and additional rent once the lender or equipment lessor asserts its right over the property. The following actual formulations are suggestive of possible approaches, but any actual lien waiver provision, of necessity, must conform to the agreement reached between the parties.
The Bank may at any time enter upon the Premises and remove the Collateral. The Bank may also take possession of the Collateral on the Premises, and may remain on the Premises for a period of time not to exceed fifteen (15) days, without charge, in order to dismantle, prepare for disposition or removal, dispose of or otherwise deal with the Collateral. If the Bank stays on the Premises for longer than fifteen (15) days, the Bank shall pay to Landlord a use and occupancy fee equal to the rent and additional rent under the Tenant's Lease, which Tenant would have paid to Landlord during such additional period, prorated for each day the Bank remains on the Premises.
After Bank has entered the Premises to take possession of the Collateral, Bank, upon ten (10) days' written notice from Landlord, shall vacate the Premises and its right to remain in the Premises shall be extinguished after such tenth (10th) day, provided, however, that Landlord will permit Lender a total of at least fifteen (15) days to remove the Collateral from the time that Bank first entered the Premises. With respect to any Collateral remaining on the Premises more than ten (10) days after such notice from Landlord to vacate, Landlord, at its sole election, may either deem such Collateral abandoned by Bank and Tenant, or Landlord may move, remove, and/or store the Collateral at the sole cost of Bank.
An actual equipment lessor's suggested formulation follows, and other than negotiating a change to its business terms, a landlord might find the approach an acceptable one.
If Debtor has vacated the Leased Premises, voluntarily or involuntarily, the Lease is terminated, or Landlord has accelerated all amounts due under the Lease, Landlord may upon sixty (60) days' prior written notice to Equipment Lessor require Equipment Lessor to remove the Personal Property from the Leased Premises. If Equipment Lessor fails to remove the Personal Property within sixty (60) days after Equipment Lessor's receipt of the foregoing written notice, Equipment Lessor will pay to Landlord the regular monthly, non-accelerated rental payments under the Lease (not including any past-due, additional or bonus rental) prorated for the number of days Equipment Lessor keeps the Personal Property on the Leased Premises after expiration of such sixty (60) day period. In any event, Equipment Lessor must remove the Personal Property from the Leased Premises within one hundred twenty (120) days after Equipment Lessor's receipt of the foregoing written notice. Nothing herein or elsewhere shall be deemed to prevent or limit Equipment Lessor, at its option, from abandoning any part of the Personal Property; provided, however, that Equipment Lessor must give Landlord written notice of abandonment in order to be relieved of any obligation to pay rent to Landlord.
Landlords, when reviewing such proposed language, should redefine what constitutes "rent" to include any pass-throughs such as taxes, common area maintenance costs or operating expenses, and insurance. Of course, many landlords will want to reduce the permissible time periods in the equipment lessor's proposal.
On occasion, the form of lien waiver is initially drafted on behalf of a landlord. Here is a sample, presented without comment, of such a clause dealing with a lender's or equipment lessor's right to enter and remain on the leased premises:
The Lessor agrees that upon any breach or default by the Lessee and subject to all rents and charges being current and to prior written notice to the Lessor, the Lender may use and occupy the Premises, but not beyond the end of the stated term of the Lease, for the purpose of keeping, maintaining and storing all, or any portion of, the Goods and foreclosing its security interests therein by selling the same on or within the Premises in one or more public or private sales in accordance with the terms, conditions and covenants of any agreement between the Lessee and the Lender and the New Jersey Uniform Commercial Code during the remainder of the original or any then applicable renewal term of the Lease, provided, however, that for each day that the Lender uses and occupies the Premises pursuant hereto, it shall pay the Lessor an amount equal to the base rent and other monetary items due under the Lease, prorated on a per diem basis.
Although the principal components of a landlord's lien waiver have already been presented, landlords, lenders, and equipment lessors also may want to address some other issues. Aside from provisions that are generally found in agreements of all kinds, these issues might include: attorneys' fees, further loans or advances or additions to the list of leased equipment, and the cost of negotiating the lien waiver itself.
Whether to provide for attorneys fees in the event of a dispute over the lien waiver may be a matter of personal preference, but it is unusual to see such a provision is the first draft of a lien waiver. Landlords should be aware of this, and, if they have a preference to include the double-edged attorneys' fee provision in the waiver, it usually has to be added by way of comment.
Lenders, and by way of extension, equipment lessors, may want to include the following (or in the case of equipment lessors, similar) language in each lien waiver: "Landlord waives notice of additional obligations or extensions or modifications... ."
Lastly, in almost every case, a landlord is accommodating its tenant's financing needs when it negotiates and delivers a lien waiver. For that reason, it is not inappropriate for a landlord to insist that its tenant sign the lien waiver and that the waiver include a provision substantially similar to: "Borrower shall reimburse Landlord for Landlord's reasonable attorney's fees incurred in connection with Landlord's review and negotiation of this Agreement."
Ira Meislik is a partner with the Montclair firm of Meislik & Levavy and has a special interest in, and focus on, commercial leasing issues.