What is a Landlord Subordination Agreement?

The small business sector in America occupies 30-50% of all commercial space, an estimated 20-34 billion square feet.

If you rent space for your business and are seeking an SBA loan, you’ll need to have a signed Landlord Subordination Agreement in order to get funded. Here’s what you need to know about this legal document.

By signing this contract, your landlord is “subordinating” their rights to your collateral in case you default. Collateral is something pledged as security for repayment of a loan, to be forfeited in the event of a default.

With a Landlord Subordination Agreement in place, the institution that loaned you money gets first dibs on your stuff if you stop making your loan payments.

There are three important sections of a subordination agreement that are important to understand:

Subordinate to Lender Lessor’s Interest

This describes what a landlord is agreeing to as it relates to the lender. It’s important that landlords understand that they are not waiving rights but agreeing that the lender has priority to the small business owner’s property if the loan goes into default.

Provide Written Notice of Default

The landlord agrees to give the lender written notice if the business owner defaults on rent payments. They also agree to give the lender the opportunity to fix the default by making delinquent payments. This is a big positive for the landlord.

Possession and Remove of Collateral

This allows the lender enter the premises of your business. They can then remove property used as collateral for your loan to liquidate in order to recover losses. The landlord should know that they aren’t waiving their claim to your collateral; they are just behind the lender in the process.

Some landlords might see signing this agreement as a negative but it’s really a positive. When small business owners are funded with an SBA loan, their goal is financial stability and growth. This is good news for a landlord – rent payments will be easier for the small business owner to make.   Additionally, as your business thrives, there will potentially be more traffic to your shop and that could attract other tenants.

At SmartBiz, a signed subordination from your landlord is required for loans $30,000 and higher. Your Relationship Manager will provide this form after you’ve uploaded required documents. You will also need to obtain an annual option to renew your lease if you do not already have one or if your lease term doesn’t match the loan term. The SmartBiz team provides “concierge service” and will speak with your landlord on your behalf if they need additional information about this requirement.

If you’re ready to seek funds to grow your small business, an SBA loan is the best bet. SmartBiz SBA loans have low rates, long terms and low monthly payments. Visit SmartBiz today and discover in about five minutes if you’re qualified for an SBA loan.