Updated on December 7, 2021
The survivability of a lease after foreclosure generally depends on priorities. This is further discussed at length in our prior blogs. Priorities are governed by the recording acts and related common law principles. However, parties have the option to contract around these laws and set their own order of priorities. This is normally done through lease clauses known as subornation, non-disturbance, and attornment clauses. The meaning and significance of these terms are discussed below:
Under a subordination clause, either a senior deed of trust or a lease agrees to convert to a junior position. For example, a landlord who enters into a lease after the landlord takes out a loan secured by a prior deed of trust can attempt to protect the subsequent tenant’s leasehold interest from foreclosure by having the lender agree to a subordination agreement.
Without the subordination agreement, the lender’s foreclosure would wipe out the lease because the deed of trust came before the lease (i.e., had priority over the lease). However, under a subordination agreement, a lender could agree to downgrade its deed of trust from its senior position into a junior one. This would prevent the lease from being extinguished upon the foreclosure of what would have been the senior lien. See Miscione v. Barton Development Co. (1997) 52 Cal. App. 4th 1320, 1327.
The same is true if the lease came before the deed of trust. A tenant can agree to subordinate its senior lease to the junior lien. By agreeing to subordinate its leasehold interest, the tenant is accepting the possibility that a foreclosure sale will extinguish the tenant’s lease. Dover Mobile Estates v. Fiber Form Products, Inc. (1990) 220 Cal. App. 3d 1494, 1498.
A non-disturbance clause is a provision in a mortgage contract that ensures that a rental agreement between the tenant and the landlord will continue under any circumstances. This is done primarily to protect the renter from eviction by the mortgagor if the property is foreclosed upon by the lender.
A subordination agreement normally applies to leases that predate lienholder interests (i.e., a deed of trust). That is, the tenant is asked to subordinate its senior lease to any subsequent deed of trust. Landlords normally require tenants to subordinate to access lender financing. This is because lenders usually require a subordination agreement as a condition to lending. Nevertheless, despite the subordination clause, tenants can protect the survivability of their lease from foreclosure by negotiating a non-disturbance clause. A non-disturbance clause provides “that a foreclosing lender with a superior lien will not disturb the tenant’s possession so long as the tenant has not defaulted on the lease.” Principal Mut. Life Ins. Co. v. Vars, Pave, McCord & Freedman (1998) 65 Cal. App. 4th 1469, 1479.
An attornement clause is similar to a non-disturbance clause. However, in an attornment clause, it is the lessee, instead of the lender, who agrees that the lease will survive a foreclosure sale and that the lessee will continue under the former lease, or execute a new lease on identical terms, with the purchaser at a foreclosure sale. An attornment clause is further different from a non-disturbance clause in that it gives the lender, or purchaser from the foreclosure sale, the option, but not the obligation, to continue the lease. Principal Mut. Life Ins. Co. v. Vars, Pave, McCord & Freedman (1998) 65 Cal. App. 4th 1469, 1479.
Each of the clauses above are meant to relieve any unwanted consequences caused by priorities and the recording acts. The effect of each of these clauses, separately or collectively, is to preserve the continuation or cancellation of the lease upon a foreclosure. Whether a lease will include any of these clauses will depend on various factors, including, the economic factor that the value of the property, and thus the security for a deed of trust, is sometimes dependent on the value of the lease.
These are some of the issues to consider when entering into a commercial lease. Our professional real estate attorneys at Schorr Law have a great deal of experience with this and other types of real estate matters and disputes. To see if you qualify for a free 30-minute consultation, contact us today!