Tenants borrow capital to fixture, furnish and equip premises, buy inventory and pay employees. When the borrower is a tenant that means a landlord is involved so a 3 way negotiation ensues. However, in these challenging economic times, capital is not as readily available and lenders are less amenable to negotiate terms affecting their security.
For the landlord, having a lender in the picture should be viewed positively. It is like getting a “guarantor” for some of the tenant’s obligations.
The lender’s security often includes:
A. a General Security Agreement (“GSA“): It is a charge over the Tenant’s personal property – furniture, fixtures, inventory and equipment – and gives the lender the right to seize and sell the charged property. If broadly worded it can also act as a form of leasehold mortgage.
B. a Leasehold Mortgage (“LM“): Since a lease is an asset if it has favourable terms in the marketplace and is assignable, a charge of the lease to the lender as security is common and may be part of a GSA or in addition to a GSA.
Well drafted leases will require the landlord’s consent to any grant of security in the tenant’s property on the premises and any transfer of the lease (which should include a transfer to a lender as security). That is why the agreement involves 3 parties – the lender, the tenant/borrower and the landlord – and is known as a “tri-party agreement”. It governs the rights and obligations of the parties in the event the tenant/borrower defaults under its lease.
What follows are some general considerations when negotiating the tri-party agreement:
1. Where Is The Money Going?: Since the tenant is financing its lease and/or goods etc., the landlord should try to impose parameters on the amount and how it is being used in so far as the landlord’s rights will be affected (the landlord prefers the money be reinvested in the premises and/or the Tenant’s business on the premises and not some new unrelated venture).
2. Who Is the Lender?: If the lender is a “financial institution” (as defined under the Loan and Trust Companies Act, Canada) that should comfort a landlord on the covenant supporting the lender’s liability and obligations under the tri-party agreement. However, if the tenant obtains financing from some other entity, the landlord may need to get security from the lender if the lender wants to go into possession of the premises on tenant default.
3. Who Pays The Legal Costs For The Agreement?: The lease should provide that the tenant pays those costs and a landlord should ensure that prior to retaining counsel, the tenant has paid a reasonable sum up front to cover legal fees so that the landlord will not be out-of-pocket if the loan falls through. The agreement will confirm this and should not be effective until payment in full is made.
4. What Is Being Consented To?: The landlord’s consent should be limited to the grant of the security and not its terms i.e. the Landlord is not commenting on the suitability or enforceability of the security charge but merely consenting to its existence.
These are some of the initial considerations the parties must have in mind when negotiating the tri-party agreement. In Part 2 of this Article in the next PropertyBiz newsletter, I will discuss “What Lenders Require From Landlords” and “What Landlords Require From Lenders” in a tri-party agreement.
The Lessons: A tenant’s need for financing is normal and can be beneficial to the landlord as well. However, there are many considerations that need to be addressed when negotiating the tri-party agreements. How these considerations are addressed depends on the relative leverage of the parties and the market conditions at that time.
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 “The Legal Corner”, please contact me directly by e-mail at [email protected] with your suggestion. Not all requests can be accommodated.]