Oftentimes, when a commercial landlord loses its property to a foreclosure, commercial tenants become confused as to the appropriate party to pay their lease obligations. In fact, commercial tenants frequently ask whether lease payments must be made to the prior landlord, the new owner, the lender, or someone else.
The general rule for commercial tenants is that they are not relieved of their lease obligations when a commercial landlord loses the leased space to a foreclosure. Instead, in most situations, commercial tenants need to make lease payments directly to the new owner of the property – and, quit often, this new owner is the foreclosing lender.
The obligation to pay the new owner is usually spelled out in an “S.N.D.A." – a subordination, non-disturbance, and attornment provision in the lease agreement. The obligations may also be spelled out in a separate Subordination, Non-Disturbance, and Attornment Agreement executed by the lender, the owner, and the tenant.
The “subordination" provision of an SNDA addresses the rights of the lender and the tenant with respect to the lender’s mortgage lien. This provisions ensures that the lender’s lien remains “senior in time" to the tenant’s leasehold estate. The “attornment" provision addresses the continued validity of the lease in the event of a foreclosure. In particular, the “attornment" provision prohibits a tenant from breaking a lease agreement by requiring the tenant to recognize a foreclosing lender as the new landlord. The “non-disturbance" provision protects tenants by requiring that lenders do nothing to interfere with the tenant during a foreclosure.
Once a commercial tenant discovers that their landlord may be facing foreclosure, the commercial tenant should look first to the SNDA provisions of the lease agreement or the provisions of a separately executed SNDA Agreement. These provisions and agreedments should clearly specify the appropriate party to whom the lease obligations are due. And, unless the SNDA states otherwise, former landlords lose their rights to collect rents upon foreclosure.
In short, problems can arise when a commercial landlord is going through foreclosure. Commercial tenants in these situations should carefully review SNDA provisions to confirm they are not creating unnecessary problems for themselves, including making payments to the wrong party. Tenants in such a scenario should also review their SNDAs with qualified counsel to determine their legal rights.
For more information, feel free to contact me at 602-687-6907 or PMacQueen@mackazlaw.com.