A lender holding security interests in a borrower’s property may be asked by the borrower or a third party to provide a waiver, no interest letter, estoppel or similar confirmation (each referred to as a “waiver”) that the lender has no security with respect to certain specific property of the borrower. The lender may be inclined to issue such a waiver in order to maintain a good relationship with its borrower.
While these waivers are often viewed on a commercial level as inconsequential documents, they can have a greater impact than intended on the rights that are being waived. It is important that the lender understands the rights that are being forfeited under the waiver. Typical waivers do not subordinate the lender’s priority to the identified third party as against certain collateral, but rather, completely disclaim the lender’s interest in that collateral. In that case, the lender may not be entitled to any of the proceeds of the specific collateral even if proceeds remain after the obligations of the recipient of the waiver have been fully satisfied. If the providing lender intends to simply subordinate its security interest to the third party’s competing security interest, a postponement and subordination is more appropriate than a waiver, and a waiver should not be provided by the lender.
Additionally, while contrary to the expectations of most lenders providing waivers, creditors that are non-parties to the waiver may be able to rely on the waiver to claim priority over the lender. While there is no apparent agreement between the lender providing the waiver and other creditors that would be required to establish privity of contract, there is some authority that a lender providing a waiver is estopped from making any claim to the subject property not only against the addressee of the waiver but also against third parties. This is not typically the intention of the lender providing the waiver. One way to address this problem is to ensure that the waiver includes an express limitation on the parties entitled to rely upon the waiver, but the more prudent approach is to consider an alternative such as a postponement and subordination.
Although maintaining good client relationships with borrowers is important, providing a waiver without first conducting proper diligence and consideration of its impacts can prejudice a lender’s rights and recovery on enforcement. When presented with a request to provide a waiver against specific property, lenders should carefully consider whether they truly wish to fully disclaim an interest in that property, or if not, whether an alternative document such as a postponement and subordination in respect of the subject asset would be more appropriate.