While a lender occupies the property, it is usually required that the lender pay the rent to the landlord. However, it is important for lenders to check the landlord`s language regarding the amount of rent owing. In some cases, landlords will require the lender to pay the rent owed under the lease, which seems reasonable at first glance. However, a review of the lease can reveal different types and amounts of rent. In addition, creditors should ensure that they are required to lease only for the period when they actually own the premises. The lender must ensure that he agrees with the rent paid and, if necessary, limit it. Are you renting space for your business and considering applying for an SBA loan? It would be a good idea to familiarize yourself with the concept of landlord subordination agreement. These agreements are common requirements for SBA loan applications, but it can be difficult to get your landlord to sign one. This could delay or even completely block your loan approval if your landlord refuses to sign. Another commonly negotiated section of a subordination agreement for landlords is the lender`s right to enter and occupy the premises to examine and/or remove the security. Lenders typically need 60 to 90 days to enter and withdraw the collateral, but in some cases, homeowners want the property removed in as little as five days. Lenders should carefully consider the minimum time required depending on the location of the property and the type of property to be removed. Typically, the lender will ask the landlord to (i) subordinate or even renounce your interest in the tenant`s property and (ii) allow the lender to enter the tenant`s premises (even after the lease expires or terminates) in order to remove any property in which the lender has an interest.
The latter is called non-interference and attornment. A conservatory assignment of the lease provision allows the lender to assign the lease to a new borrower who is willing to take over the lending and business activities of an original borrower. Landlords are generally reluctant to accept that the lender chooses a new tenant. A landlord may agree to authorize an assignment with the landlord`s prior written consent, which usually depends on a credit review of the new tenant. Ultimately, the assignment of security means that the lender helps the landlord find a new tenant to rent the property, which benefits both the landlord and the lender, provided that the new tenant also takes over part or all of the loan. Pay particular attention to the subsection entitled “Subordinate to the interest of the lender landlord”. These rates spell out exactly what your landlord agrees to give up their position vis-à-vis your lender. Emphasize that the bid is not a waiver of their rights, but simply the consent that your lender takes precedence over your property in the event of default.
Sometimes a tenant sends a landlord a short agreement that they have already signed with a note that says, “My lender asked us to sign this short agreement. Can you please elaborate? Agreements are usually short for one reason: they contain only the provisions the lender needs to protect its interests and not the interests of the owner. However, the terms of the agreements are negotiable even if your tenant has already entered into the contract. You should not hesitate to inform the tenant that the conditions must be negotiated. This describes what a landlord agrees to in relation to the lender. It is important for landlords to understand that they are not waiving their rights, but agree that the lender will take precedence over the small business owner`s property if the loan defaults. In plain language: the landlord “subordinates” his rights to your of course if you are in default. In other words, the lender receives the first Dibs. However, your landlord does not completely waive their rights. Although landlord subordination agreements are usually one- to two-page documents, these documents can be difficult to finalize and often lead to lengthy negotiations.
It is important that lenders are aware of the terms of the owner`s subordination agreement and understand both the lender`s internal policies and SBA requirements when negotiating with landlords. Whenever an SBA loan contains tangible personal property of the borrower as security, the SBA requires lenders to obtain a lien agreement from owners and sub-owners before entering into that gives the lender, in addition to lien subordination provisions, at a minimum: (i) a notice of default by the borrower under the lease, (ii) an opportunity to remedy the defect; and (iii) access to leased premises to collect warranties. If a substantial portion of the loan proceeds are to be used for leasehold improvements, or [ii] a substantial portion of the security consists of leasehold improvements, furniture, machinery or equipment attached to leased property,” the SBA also requires lenders to receive an assignment of lease security. Most SBA subordination forms require the landlord to notify the lender of the borrower`s default under the lease. This notice is important because borrowers often default on the lease before defaulting on SBA loans. While the lender`s credit documents may state that a lease default is a default under the loan, this does not protect the lender if it is not aware of the lease default. Therefore, the landlord`s subordination agreement should provide that the landlord cannot terminate the lease or remove, sell or otherwise dispose of the borrower`s personal property without first notifying the borrower of the borrower`s default and have the opportunity to remedy or exercise the lender`s rights under the landlord`s subordination agreement. The warranty description should be limited in scope and easy to identify, avoiding general descriptions. The specificity of the definition ensures that you do not waive or subordinate any rights to property other than those financed by the lender, including your own property, such as property improvements, plumbing, or furnishings. You could be infringing your own mortgage if you waive your interest in these items.
By signing this contract, your landlord “subordinates” his rights to your titles in case of default on your part. The guarantee is something that is given as collateral for the repayment of a loan that expires in case of default. Finally, make sure the contract requires the lender to pay you the rent, including base rent and additional rent otherwise owed by the tenant under their lease, for any time you cannot re-rent the space due to the presence of the tenant`s property. Without such a provision, you may have space at your disposal that can be rented elsewhere that you cannot rent. Therefore, you will have to pay expenses and taxes that would otherwise have to be paid by the tenant until the lender withdraws the collateral. Small business owners trying to apply for a loan that requires a subordination agreement may find that the process is taking longer than expected if their owner refuses to sign. In these cases, your bank could contact the SBA or its own commercial underwriting services to waive the requirements of a signed subordination agreement for owners, but this results in further delays in financing the financing.  Finally, the loan could be rejected out of hand without the subordination agreement signed by the owner. SmartBiz requires a signed subordination from your landlord for loans of $30,000 or more. Your relationship manager will provide you with this form after you have uploaded the required documents. You`ll also need to get an annual option to renew your lease if you don`t already have one, or if your lease term doesn`t coincide with the repayment term. The SmartBiz team offers a “concierge service” and will speak to your landlord on your behalf if they need additional information regarding this requirement.
Some owners may see the signing of this agreement as negative, but it is really positive. When small business owners are financed by an SBA loan, their goal is financial stability and growth. This is good news for a landlord – rent payments will be easier for the small business owner to make. As your business thrives, there may be more traffic to your business, which could attract other tenants. The purpose of this contract is to solicit and confirm the lessor`s willingness to facilitate the loan by agreeing to subordinate its interest in the guarantee, if necessary, and to grant the lender access to the security located in the premises in the event of default by the lessee under the following conditions. Try to encourage your landlord to sign the ordination agreement by reminding them that you need this financing to grow your business, which will improve your cash flow and pay you rent to the landlord for the remainder of your lease.