Tenants' Rights in a Commercial Property Foreclosure

In today's economic climate, commercial properties are foreclosing at a rate higher than years past. Tenants in commercial properties need to protect their rights in case of a possible commercial property foreclosure. The best way for a tenant to do this is directly enter into a Subordination, Non-Disturbance, Attornment (SNDA) agreement with the lender.

SNDAs

Lenders, like tenants, want to protect their interests in case of a commercial foreclosure and at times their interests include retaining the current occupants. Therefore, lenders and tenants sometime deal directly and negotiate terms of subordination, non-disturbance and attornment that protect all interests.

Subordination - In a SNDA, the subordination clause prioritizes the lender's security interest above any existing lease. If the lender decides to terminate the lease, a tenant who wanted to exit the contract is now free to do so without default. However, if the tenant wishes to remain, the leverage belongs to the lender in negotiating new terms. Sometimes it is in the best interest for both parties to allow the tenant to continue operations. For example, if the tenant is a store in a foreclosed mall, and that tenant has been performing well, the lender most likely will want the tenant to remain instead of looking for a replacement.

Non-Disturbance - Even in the case of subordination, a non-disturbance clause protects a tenant in the case of a foreclosure. The clause prevents a landlord or a foreclosing lender from disturbing the tenant's possession just as long as the tenant continues to pay rent and comply with the terms of the lease. However, a non-disturbance protection usually does not extend to any modification of the original agreement that is without the lender's consent.

Attornment - Attornment is a common law principle in which the tenant and the lender agree that the lease terms will not be nullified by a possible foreclosure. Attornment basically extends the terms of the lease and clarifies the rights and responsibilities of each party in case of a foreclosure. However, depending on negotiations, attornment may be more lender-favorable than tenant-favorable, for example, limiting the lender's or successor's liability for any defaults by the previous landlord.

Foreclosure Without an SNDA Agreement

Without any language on subordination, non-disturbance or attornment, if the lender's security rights were recorded before a lease was entered into, the lender can terminate that lease in case of a foreclosure. In this case, any subsequent negotiation is leveraged in the lender's favor.

Consult an Attorney

A commercial property foreclosure can be disadvantageous for a tenant. For this reason, a lease agreement should be negotiated with terms that will protect the tenant's interests. SNDAs consider the interests of all parties involved. If you are a tenant, consult with an attorney to ensure that your lease agreement protects your interests in case of a possible foreclosure.