Landlord Liens: When Is Waiver and Subordination Not Waiver and Subordination?

Franklin County Area Dev. Corp. v. Edge Pennsylvania, LLC (In re Edge Pennsylvania, LLC), 580 B.R. 120 (Bankr. M.D. Pa. 2017) –

A commercial landlord brought a state court action to determine the priority of its landlord lien versus a lender’s security interest in equipment located on the leased premises. Alternatively, the landlord sought rent payments from the lender. The case was removed to federal court due to the tenant’s bankruptcy filing, and the lender moved for summary judgment.

During the bankruptcy the debtor had defaulted under the lease. It also defaulted under a stipulation with the lender regarding use of cash collateral. Both the landlord and the lender were granted relief from the automatic stay in order to pursue their nonbankruptcy remedies against the equipment. In the meantime, the court approved the sale of the equipment free and clear of all liens (with liens to be transferred to proceeds).

The landlord contended that it had a lien on the equipment, the lien was superior to the lender’s security interest, and satisfaction of its lien should be paid out of the proceeds of the sale. Alternatively, it claimed that the lender agreed to pay rent while it was in possession of the property after the lease was terminated, and accordingly rent was due from the time the lease was terminated until the date the equipment was removed.

A threshold question in the battle between the landlord and lender was whether the landlord had a lien in the first place. The lender also argued that even if the landlord had a lien it was subject to the lender’s security interest pursuant to a landlord waiver and subordination agreement.

The waiver and subordination agreement contained typical provisions, including the following:

[T]he parties agree as follows:

1. That any and all liens, claims, demands, or rights, including but not limited to the right to levy for distraint for unpaid rent which Landlord now has or hereafter acquires on or in any of Tenant’s personal property upon which Lender obtains a lien or security interest shall be subordinate and inferior to the liens or security interest of Lender and as to Lender, Landlord hereby specifically waives all rights of levy, distraint or execution with respect to this property.

4. That Landlord will use its best efforts to give at least thirty (30) days prior written notice to Lender of the termination of Tenant’s lease and will allow Lender a reasonable time in which to remove any of Tenant’s property upon which Lender has a lien or in which Lender has a security interest, provided, however, that in no event shall Lender have the right to leave said property on the premises for a period in excess of thirty (30) days after the termination date of Tenant’s lease. Lender shall pay to Landlord on a weekly basis in advance (pro rata, depending on the number of days Bank is in possession), the current monthly rent accruing under the Lease during any period while the Bank is in possession of the leased premises after the Lease termination date.

Under state law, a landlord’s lien arises when a levy is made under distraint proceedings. Although the landlord had not acted prior to the bankruptcy filing, after it was granted relief from the stay the landlord confessed judgment and took possession of the leased premises, which it contended was sufficient to trigger the lien.

The court found that this was sufficient to establish that there was a dispute of material fact regarding whether the landlord exercised its right to distraint, and thus whether there was a landlord lien. Consequently, the court turned to the lender’s argument that the landlord lien was subordinated.

Although it might appear that the waiver and subordination language was clear, the landlord argued that the lender’s removal of its collateral within 30 days after the lease was terminated was a condition precedent to the landlord waiver and subordination. After reviewing applicable state law regarding contract interpretation, the court again found that the landlord’s argument had enough plausibility to preclude granting summary judgment.

The rent issue turned on whether the lender was in “possession” of the leased premises. The landlord argued that it was sufficient that the lender had a right to be on the leased premises and an obligation to remove the equipment within 30 days. The lender argued that possession required actual physical presence. Again, the court determined that there was sufficient ambiguity to preclude branding summary judgment.

Accordingly, the court denied the lender’s motion for summary judgment on all counts.

As noted above, there was nothing particularly unusual about this landlord waiver and subordination agreement. It is likely that most lawyers negotiating this language would be surprised to hear that removal of the lender’s collateral was a condition precedent to the effectiveness of the waiver and subordination.

Vicki R Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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