Require Tenants to Promptly Sign Lease Amendments Demanded by Lenders

Don’t let a tenant’s foot-dragging cost you a loan.

Landlords seeking to finance their properties may have to amend their leases to satisfy prospective lenders. Failure to make the changes a lender requests could end up costing you the loan. The problem is that you may not be in a position to meet lender demands. After all, amending a lease is a two-way street that requires the timely cooperation of tenants. And there’s no guarantee that your tenants will accept the particular lease changes you may need to secure a loan. Tenants may also recognize that they have you over a barrel and demand exorbitant concessions in return for signing the amendment.

The good news is that you can avoid getting into this situation by acting proactively. Attorneys recommend adding language to your lease that requires tenants to accept lease amendments demanded by the landlord’s lender within a stated deadline. The clause should also give you the right to take timely action to force through lender-requested amendments in case tenants do drag their feet.

Here’s how to negotiate and draft such a provision, along with a Model Lease Clause that you can adapt for your own use.

Anticipating Lenders’ Lease Amendment Demands

A big reason that banks and other lenders scrutinize, and are apt to demand changes to, landlords’ lease agreements is out of concern over the consequences of a landlord’s default under the lease. Thus, many lenders want to be sure that they can do something before a landlord’s lease violation triggers a tenant’s right to stop paying rent, terminate the lease, or sue the landlord for damages. Accordingly, they may want to make amendments to the lease’s notice and default clauses that enable them to step into the shoes of the defaulting landlord and cure a default on the landlord’s behalf.

Another key focus of lenders’ due diligence is the lease’s subordination clause—specifically, confirmation that it subordinates the tenant’s lease interest to the lender’s mortgage or loan agreement. If the lease lacks clear language to this effect, lenders will want an amendment affirming that their rights take precedence over the tenant’s. 

Problem: Standard Leases Don’t Give You Adequate Control

While many standard leases include general language requiring tenants to accept lender-requested amendments, they typically don’t provide for a specific timetable. This enables tenants to drag their feet on signing the lease amendments that the landlord needs immediately to satisfy the lender and secure the loan.

The other weakness in standard leases is their failure to give landlords specific remedies against tenants who balk at signing lender-requested amendments. That leaves landlords to rely on the general default clause, which is usually slow, cumbersome, and not designed for situations demanding fast action. The landlord’s only remedy may be to terminate the objecting tenant’s lease. But by the time the landlord delivers the amendment, it may be too late to save the loan deal. Result: The landlord ends up losing not only the loan but also a tenant.

Solution: Require Swift Tenant Agreement

Ensure your lease gives you the rights and remedies you need to deliver the amendments lenders want within the timetable they demand. Like our Model Lease Clause: Require Tenant to Sign Lender-Requested Lease Amendments, your lease provision should include three key things:

1. Tenant’s duty to sign lender-requested amendments by specific deadline. First, the clause should require the tenant to sign lease amendments that a lender requests within a specific and short period after they receive the landlord’s written demand. While the exact deadline is subject to negotiation, you need to give the tenant enough time to review the amendment without delaying the landlord’s loan application process. In accordance with attorneys’ suggestions, our Model Lease Clause gives the tenant 15 days to sign [Clause, pars. 1 and 2].

2. Landlord’s right to terminate if tenant doesn’t sign in time. The clause should also give the landlord effective remedies if the tenant doesn’t sign the lender-requested amendment by the deadline. Our Model Lease Clause actually gives the landlord two options, the first of which is early termination of the lease [Clause, par. 2(a)]. Threat of early termination should light a fire under the tenant. The problem is that making good on the threat may also hurt the landlord if the tenant is one otherwise worth keeping. Recognizing this, valued tenants may call your bluff and dare you to terminate them for not signing the amendment.

3. Landlord’s right to sign on tenant’s behalf. To enhance your flexibility and avoid the dilemma of choosing between the lender and a valued tenant, the Model Lease Clause includes a second option, namely, the right to sign the amendment on the tenant’s behalf. Technically, the clause appoints you to act as the tenant’s “attorney-in-fact” with legal authority to execute in the tenant’s name the lease amendments necessary to keep the financing on track [Clause, par. 2(b)].

Compromise Solution 1: Limit Clause to “Reasonable” Amendments

Forcing tenants to accept lease amendments dictated by the landlord’s lender may seem unduly harsh. However, attorneys say that the changes lenders request typically affect terms that are peripheral and of little direct concern to tenants. Even so, tenants may object to giving their landlords so much authority. And if they have bargaining clout, you may have to do something to allay their concerns.

One effective approach, according to experienced attorneys, is to limit the clause to “reasonable” changes requested by a lender [Clause, pars. 1 and 2 optional language]. Although this compromise seems fair to both sides, disputes over what “reasonable” means could easily unravel it. That’s why you should provide either a specific definition or, as the Model Lease Clause does, a set of parameters for determining which changes are reasonable and subject to the clause. The parameters of reasonable changes should correspond with the amendments lenders are likely to demand, including changes to the lease’s provisions governing:

• Subordination, which ensure that the lender’s legal claims under the loan take priority over the tenant’s claims under the lease;
• Attornment, which ensure that the tenant will acknowledge the lender as the new landlord if a foreclosure occurs;
• The tenant’s obligation to notify the lender of any landlord defaults under the lease; and
• The lender’s right to cure any lease defaults committed by the landlord necessary for the lender to take possession of the building, shopping center, or other property or facility that the premises the tenant leases is a part of [Clause, par. 3].

Compromise Solution 2: Carve Out “Unreasonable” Amendments

Tenants may demand further assurances that lender-requested amendments won’t adversely affect their fundamental rights and obligations under the lease. Including language stating these principles may open a major loophole by enabling the tenant to claim that any lender-requested change has such an adverse effect. Attorneys suggest that a better approach is to list the kinds of lease changes the tenant doesn’t have to accept even if a lender requests them. Such “unreasonable changes” would include those that:

• Increase the tenant’s rent or other financial obligations under the lease;
• Shorten the lease term;
• Eliminate or limit the tenant’s renewal rights and options; and
• Reduce the amount of time the tenant has to cure defaults [Clause, par. 4].