Foreclosure & Commercial Lease Obligations of a Tenant
Following a foreclosure, your rights and obligations as the tenant in a commercial lease will hinge on the agreements you made when you first negotiated your lease. Your lease likely went beyond stating the amount of your rent and the lease term. A well-drafted commercial lease specified what would happen if your landlord faced foreclosure.
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Foreclosure
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When a creditor extends money to a debtor, it typically seeks collateral to protect its interests in case the debtor defaults. Foreclosure is the process of transferring the title of property serving as collateral from the debtor to the creditor following default. When the collateral at issue is subject to a lease, the foreclosure’s affect on the lease will depend, in part, on which state the property is located in. In some states, such as Oregon and New York, leases automatically extinguish upon foreclosure. These states are called automatic foreclosure states. In other states, such as New Jersey and Georgia, foreclosing lenders have the option to choose which leases to keep or extinguish.
Leasehold Interest
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Commercial leases create a leasehold interest. A leasehold interest is a legally enforceable right to occupy property for the term of the lease. If your lease was in place prior to a creditor’s lien, then your leasehold interest would generally mean a new owner would not have the power to evict you from the premises following a foreclosure; however, subordination clauses change this. A subordination clause states you agree to allow your rights to become subordinate to a lender's rights. Accordingly, if the lender concludes a property is worth more without you, it may evict you following foreclosure. Subordination clauses are a standard part of commercial leases and subject to negotiation.
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Attornment Clause
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If your commercial lease contained an attornment clause, then you have an obligation to continue your lease with your building’s new owner following the foreclosure. Your signature on a lease containing an attornment clause represents your consent to accept the new owner as your landlord rather than walk away following the foreclosure. This is beneficial to the new owner because it ensures the property will continue to earn cash following foreclosure.
Non-Disturbance
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If you thought ahead when negotiating your commercial lease, you had your landlord's lender sign a non-disturbance agreement. A non-disturbance agreement is the lender’s promise to you that it will, as the name suggests, not disturb your lease even if it forecloses. Some lenders place restrictions on their non-disturbance agreements. For example, the lender may specify it will not accept liability for the former landlord’s improper conduct even though your lease gave you recourse for such conduct.
Warning
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Consult a licensed attorney in your state for legal advice concerning your specific situation.
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References
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