Pre-laying Foundation for Lender Consent to Future Leasing Activity
No landlord wants to potentially lose a financially viable tenant merely because the landlord's lender delayed in approving the proposed lease. Accordingly, it is important to negotiate certain parameters into the loan documents, under which the landlord's lender pre-approves leases that satisfy certain predetermined criteria. Lenders are often receptive to language stating that only a "Major Lease" needs to be first approved by the lender. The definition of Major Lease will naturally vary depending on the loan and the size of the property or portfolio. A lease may classify as a "Major Lease", if the lease (i) is above a certain square footage, (ii) does not contain certain specified terms, (iii) contains a purchase option and a right of first refusal, or (iv) is with an affiliate of the borrower. It is common that the definition may be expanded to include all leases, if there is an event of default under the loan.
If the proposed lease is deemed a Major Lease, it is critical to include "deemed approved" language in the loan documents. While such language may ultimately require the borrower to deliver the request (and possibly a second notice) to the lender in connection with any proposed lease, it will ensure the borrower that the lender or servicer will review and respond promptly (or risk such lease being deemed approved). It is also important to establish a lender contact person and clear line of communication at the beginning of the loan, which would include obtaining a name and email address for a relationship manager with approval authority. The borrower should also follow up after any syndication, securitization, or other transfer of the loan for clear direction on the notice address for consent requests, so that future notices are not overlooked. Incorporating such approval mechanisms on the front end of the loan will help ensure that the property remains as leased-up as possible and best situated for consistent cashflow.
Team
- Principal | Business Section Chair