Location, Location, Location – It Matters for Agricultural Personal Property Collateral Too
“Location, location, location” is a common phrase used in connection with real estate financing, but don’t forget that “location, location, location” is equally as important in connection with agricultural loans secured by personal property. A lender needs to know where the collateral is located and needs to make sure it has a legal right of access to that real estate to take possession of the collateral in the event of a default by borrower. This article discusses the key terms to include in an agreement for access to the real estate where the agricultural personal property collateral is located.
A lender’s need to access a third party’s real estate arises in two common situations in agricultural lending. First, when the borrower’s personal property is located on or produced from real estate owned by a third party, as a result of a lease, occupancy agreement, storage agreement or some other arrangement. In a default scenario, the third-party real estate owner could bar the lender from coming onto the real estate to take possession of collateral or to demand that the lender pay rent far in excess of the rent paid by the borrower in order to obtain access to the real estate. Obtaining an agreement among the real estate owner, the borrower and the lender that grants the lender the necessary access rights should help to avoid that result. A similar issue arises where there are two related borrowers, one of which is the operating company, and the other owns the real estate upon which the business is operated. Although the borrowers are related, the lender should require that a formal lease exists between the operating entity and the real estate entity, and that both parties enter into an access agreement with the lender to make it clear that under no circumstance can the real estate entity bar the lender from coming onto the real estate to take possession of, or care for, personal property collateral in which the lender has a security interest.
The next situation occurs when a borrower’s personal property is located on or produced from borrower owned real estate financed with a separate lending institution. The risk in this situation is that, in the event of a foreclosure by the real estate secured lender, the real estate lender could bar the operating lender from accessing the real estate to take possession of its personal property collateral. In this circumstance, the operating lender should seek a prospective agreement with the real estate lender to obtain rights of access in order to care for and take possession of the borrower’s personal property on the foreclosed real estate.
The terms and conditions of an access agreement will vary depending on the type of collateral located on the leased property, but key provisions to negotiate include the scope and duration of the access, the costs lender will have to pay in exchange for access, and notice of defaults.
The form and scope of lender’s access rights will depend in large part on the type of borrower’s personal property located on the real estate. One size definitely does not fit all circumstances, so it is important to make sure that the scope and duration of a lender’s rights are sufficient for the facts needing to be addressed. For instance, if the only personal property located on leased real estate is a piece of easily removable equipment, the scope and duration of the access agreement does not need to be extensive. Instead, it only needs to be long enough for the lender to come on the property to take possession of and remove the equipment, which can be accomplished within a few days. On the other hand, if the personal property in question requires longer term care or is difficult to remove, the scope and potential length will need to be far greater. For example, if the borrower is growing crops or maintains livestock on third party real estate, the lender will need continual access to that real estate for several months to care for the growing crops or the livestock until the lender is ready to harvest the crops or remove the livestock.
The access agreement should also specify whether the lender has to pay past due rent owing from the borrower to the real estate owner, and whether the lender has to pay any rent to the real estate owner during the period the lender is using the real estate. The purpose of agreeing to these costs in advance is to eliminate the risk that the owner will charge an unreasonably high amount of money for the lender’s access to the property. Ideally, the lender would not pay any rent during its limited period of using the real estate, particularly if the real estate owner and the borrower are related parties. If, however, the real estate owner insists on compensation, the lender should not have to pay more than the rent being paid by the tenant.
If the borrower cannot make its lease payments or is otherwise in default under the lease, it may not voluntarily tell the lender because that could be an early warning sign that the borrower could default on the loan. To eliminate the risk that the borrower defaults on the lease without notifying the lender, the access agreement should include (1) the real estate owner’s obligation to provide notice to the lender of any defaults by borrower under the lease or other agreements evidencing the relationship between borrower and the real estate owner and (2) rights for the lender to cure those defaults.
Ultimately, the purpose of an access agreement is to allow the lender and the real estate owner to maintain the status quo in the event the borrower defaults so the lender can continue using and accessing the personal property on the real estate in the same manner as the borrower. The terms necessary to maintain the status quo will vary for each transaction, but the key to negotiating an agreement is understanding the personal property located on the property and how long it will take to remove the collateral.