Landlords and secured lenders (i.e., lenders with a security interest in tenant’s personal property as collateral for a large loan) should remember to consider underlying applicable state law governing removal of a defaulted tenant’s property when negotiating landlord waivers or collateral access agreements.
Competing interests are at play between landlords and secured lenders when it comes to how a defaulted tenant’s property should be handled. A landlord is most interested in its ability to reposition its building, either through signing a lease with a new tenant or by selling the asset – something that may be difficult with the property of its defaulted tenant still at the premises. For a landlord, setting a finite amount of time to allow tenant’s property to remain at the premises, or else be considered abandoned, is critical to this process. The secured lender, on the other hand, desires ample opportunity to devise a plan for the disposition of tenant’s property; and in some cases, if the secured lender does not want to terminate tenant’s financing, it may not be motivated to remove the tenant’s property quickly.
Depending upon where the property is located, it may be well worth the effort for a landlord to carefully negotiate a collateral access agreement with its tenant’s secured lender. For example, relying on applicable law in New York may not be in the best interest of Landlord, where rights at law only address the period after the secured lender has decided to remove its collateral. (See UCC § 9-604(d) — Landlord has the right to:
- receive reimbursement for the cost of repair of any physical injury caused by the removal
- refuse permission to remove until the secured party gives adequate assurance for the performance of the obligation to reimburse –available at http://www.law.cornell.edu/ucc/9/9-604
It follows that simply relying upon applicable law in New York would not provide adequate guidance as to how long a landlord would be required to keep a tenant’s property at the premises before it feels comfortable disposing of such property without liability to the tenant or secured lender. Landlords can make determinations as to what may be commercially reasonable (e.g., providing the same notice that tenant would be entitled to at law to the secured lender prior to disposal), but any such actions could nevertheless be subject to legal challenge by the secured lender.
Several other commonly negotiated points, such as (1) the right to collect rent for the period in which secured lender’s collateral remains at the property and (2) the ability to receive an indemnification from the secured lender in connection with any damage to the property, are also not part of New York law. These points and those discussed above are good reasons for landlords to refresh themselves on local law before determining whether to stick with applicable rights at law or to negotiate an agreement with the secured party.