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Landlord Rights & Waivers

Commercial businesses may encumber a variety of assets to secure financing. Such collateral may include inventory, furniture or fixtures, interest in a leased property or even the lease itself. If a borrower/tenant should be in default of a financing agreement, a lender may assert claim to properties in which a landlord may also have a staked interest in order to satisfy rent owed in arrears.

The remedy of distress is a powerful remedy granted to commercial landlords. In order to satisfy unpaid rent, a landlord has the right to seize only a tenant’s assets which are located on the premises rented. This ‘right of distraint’ becomes problematic for lenders if chattels to be seized (‘distrained’) by a landlord also constitute collateral under a financing agreement and if the tenant has not declared bankruptcy. The Bankruptcy and Insolvency Act clearly ranks secured creditors ahead of landlords in seizing and liquidating goods to satisfy outstanding debt, so competing claims of seizure arise only previous to and outside of bankruptcy. 

The key to avoiding such entanglements is a landlord waiver. This is an agreement obtained by the borrower in which the landlord waives the right to distrain against encumbered property or agrees to subordinate its claim to distrain in the lender’s favour. In fact, the landlord’s consent is often a necessary condition to encumbering personal properties, for many commercial leases contain terms that prohibit a tenant from encumbering its chattel to the lender. 

Obtaining a landlord waiver can often prove to be a tricky and sticky situation if a borrower is already in a lease with an obstinate landlord. These waivers, in many cases, are critical to the funding of commercial loans and in many cases landlord’s can pose significant roadblocks. This tension can be alleviated by careful drafting and the softening of the “waiver language” to keep the landlord’s rights in play. 

At the end of the day, all parties should be aligned in getting a deal done, as borrowers usually need operating lines and other facilities to keep their businesses running smoothly and successfully (so that they can pay rent!). Good representation (for every party in this dance) will recognize this fact and draft agreements that will ensure that common ground can be found. 

If you have any questions relating to any of the above, please do not hesitate to contact David Di Gregorio at ddigregorio@kmblaw.com or 905.276.0429.

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This article is provided for general information purposes and should not be considered a legal opinion. Clients are advised to obtain legal advice on their specific situations.

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