March 19, 2013
Whenever any commercial landlord and tenant enter a lease, each believes that the rental relationship will succeed, but reality says this is not always true. That is why tenants and landlords should make certain to ensure that the lease agreements they sign contain all necessary protections, should the arrangement fail. In commercial leases, it is impossible to overstate the importance of, as author Lee Child wrote, “Hope for the best, plan for the worst.”
New Jersey law, under the Landlord-Tenant Act, gives landlords quasi-lien rights; specifically, a preferential right to payment of up to one year’s unpaid rent out of the sale of the tenant’s assets located on the landlord’s property. The landlord’s rights under the Landlord-Tenant Act are not an actual lien until certain criteria required by the statute are satisfied. Until those criteria are met, the tenant may dispose of assets, remove them from the property or grant a security interest in the assets to another.
Another statute, the Loft Act, establishes a lien with priority over “any title, lien, interest, mortgage, judgment or other encumbrance” in the tenant’s machinery equipment located on the property. This lien is limited, however, covering only six months’ unpaid rent and applying only if the tenant engages in the manufacturing business.
These statutory rights pose a substantial risk to the tenant’s potential lenders. For instance, a non-purchase money lender’s rights, even with a perfected lien, would be trumped by a landlord’s Loft Act rights. As a result, lending institutions and equipment lenders often require a lien waiver before lending money or renting equipment to a tenant business. The lien waiver typically purports to remove that risk by ensuring the viability of the collateral pledged as security on any loan or lease entered into with the tenant. Agreeing to the waiver may make business sense for a landlord as, by making the tenant a more attractive credit prospect, the landlord boosts the tenant’s potential for financial success, which benefits both parties.
As with many aspects of the law, the devil is in the details with lien waivers. Landlords should take care to understand exactly what rights they are waiving. As an example, if a piece of personal property is located within the rented premises, the landlord should ensure that the lien waiver exempts it and that the tenant and tenant’s potential creditor explicitly recognize the landlord’s ownership of that asset. Landlords may also want to consider adding language to the waiver that places obligations and responsibilities on a creditor that removes equipment similar to what it might impose on tenant. These might include: provisions regarding repairing damage resulting from the initial installation, presence, or removal of tenant’s equipment.
Landlord liens and lien waivers can be complex, tricky matters. Whether you are a landlord, a tenant or a lender, it is important to obtain experienced, knowledgeable counsel to ensure that you’re adequately protecting your rights and business position. To help you craft an agreement that meets these needs, contact the real estate attorneys at Samuel C. Berger, P.C. Our New Jersey real estate attorneys can provide you with the skilled representation your business needs. Contact us online or call (201) 587-1500 or (212) 380-8117.
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