The Legal Corner
Tenant Financing and Tri-Party Agreements Ė Important Considerations - PART 2
Property Biz Canada - The Legal Corner
Tue Jun 12 2012
This article has been contributed by Darrell Gold LLB with Robins Appleby & Taub LLP
This Article is a continuation of my prior one where I discussed the initial considerations to address when dealing with a tri-party agreement amongst a lender, landlord and tenant/borrower for tenant financing. Those considerations were: Where Is the Money Going: Who Is the Lender: Who Pays the Legal Costs for the Agreement: and, What Is Being Consented To:. Now I will focus on the material issues for the landlord and the lender that typically drive the negotiations.
1. What Lenders Require From Landlords:
a. Notice of Default - The lender needs notice of lease default and an opportunity to cure it (to avoid prevent distraint or lease termination). The lenderís cure period will extend beyond the tenant cure period as the lender waits to see if the tenant will cure. If that tenant cure period expires, a landlord may still want the right to pursue the tenant for damages while the lenderís continues to cure the default and the lender may then need to find a new tenant.
b. Waiver or Postponement of Distraint/Termination Rights: The lender wants assurance that the landlord will not exercise remedies such as distraint [seizing and selling the tenantís goods] or termination on tenantís default. Agreements provide for this by way of waiver by the landlord of its right to distrain. My view is that it is preferable to have the landlord agree to postpone its distraint right to the lender rather than waive it altogether as a tenantís assets may be worth more than the lender is owed and the landlord can then distrain for the balance.
c. Right to Possession and Compliance with the Lease: The lender needs a right to possess the premises for the purpose of disposing of the tenantís assets to 3rd parties if the business will not be sold, or for the purposes of maintaining the tenantís business to transfer it with the lease to a 3rd party purchaser/transferee with the landlordís consent. That takes time. Landlords must have approval rights over a proposed tenant.
d. The Right to Transfer the Lease: The Lease should be brought into good standing before consent to a transfer by the lender and the transfer terms of the lease should govern the transfer including no change in use from the lease, unless the landlord is prepared to consent to that.
e. A Full Release: The lender will want to be released after a transfer or after it vacates possession. It sees its position akin to that of a trustee in bankruptcy and like a trustee, once it assigns or disclaims the lease, it has no further obligations. The landlord prefers to characterize the lender as an assignee and assignees donít get released when they assign the Lease. So these interests need to be balanced. Where the Lender is assigning the Lease, the landlord must be satisfied with the financial covenant of the new tenant before releasing the lender.
2. What Landlords Require From Lenders:
a. Payment of Rent Arrears: The Landlord should require payment of all or some rent arrears (lenders may pay up to 3 months but usually one month at most), that outstanding curable defaults are remedied, and that the lender agrees to be bound by the lease throughout the possession period.
b. Responsibility for Premises Damage: The lender should be responsible for damage it causes during occupancy and in removing the assets. A security deposit to protect against this risk is wise if the lender is not a ďfinancial institutionĒ. The premises should be viewed by the lender and landlord together before possession to determine the base-line condition at possession. When the lender vacates possession, they will view it again to determine if any damage has occurred which needs to be repaired.
c. Fixed Time Period for Occupancy: The possession must have an end date after which the landlord has the option to take back the premises on notice. Otherwise it can create problems for financing, selling the property or leasing it as the landlord does not control the occupancy until the Lender decides what its doing. The period will depend on the market, the nature of the business and premises etc. The agreement can provide that if more time is needed the lender becomes the tenant for the balance of the Lease and subject to the transfer terms of the lease.
d. Removal from Title: The Lender should agree to remove the LM from title at its cost on vacating possession.
e. Bankruptcy and Insolvency: A landlord can lose the right to exercise termination and distraint rights if the lender puts the tenant into bankruptcy. Consider adding language to the agreement that the lender will not do so if it will affect the landlordís rights and remedies to go forward afterwards and lease out the premises.
3. Freehold Mortgagee Consent: Consider whether consent of the freehold (landlordís) mortgagee is needed to a leasehold mortgage. Review the landlordís mortgages. Any termination or transfer of the lease without their approval may be a default under the landlordís loans. If consent is needed then that is another party to negotiate with.
The Lessons: All 3 parties benefit from an agreement that allows the tenant to borrow funds to operate its business, permits the lender to realize on its security over the tenantís assets and the lease in an orderly and time controlled manner and gives the landlord another party who may step up to the plate to rectify lease defaults and locate a new tenant for the landlord at relatively little cost to the landlord in terms of leasing fees and costs to repair the premises.
Disclaimer: This article is for general information purposes only and not intended as or to be relied upon for legal advice. Consult with a lawyer for your unique situation.
[*If there is a general real estate or leasing related question you would like to see addressed in a future article in ďThe Legal CornerĒ, please contact me directly by e-mail at firstname.lastname@example.org with your suggestion. Not all requests can be accommodated.]