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Web Articles
                     Tenant's Rights when
            Leased Property is Foreclosed

Commercial Tenant

If a commercial real estate project is financed and the property
is encumbered by a mortgage, either the lender who holds such
mortgage or the tenants leasing all or a portion of such
commercial property may request a Subordination, Non-
Disturbance, and Attornment Agreement (SNDA) from the other
party.  The lender and tenants of the commercial property
typically enter into SNDAs when the mortgage is granted on the
property, if there are already tenants in place, or when a lease
is entered into, if the property is already encumbered by a
mortgage.

An SNDA typically embodies several different provisions which
govern the relationship of a lender who has foreclosed upon the
mortgage that encumbered the commercial property and the
tenant who leased all or a portion of the commercial property.  
The tenant obviously would typically want to continue to occupy
the leased commercial space so they secure from the lender an
agreement that if the lender forecloses on the property, the
lender will not disturb the tenant’s right to occupy the leased
space so long as tenant is abiding by the terms of the lease
(Non-Disturbance).  If the tenant is not abiding by the terms of
the lease then the lender who foreclosed on the property is still
free to evict the tenant.  

In return for this assurance from the lender that they will not
disturb the tenant provided the tenant continues to abide by the
terms of the lease, the tenant agrees to make their lease
subject to and subordinate to the lien of the mortgage
(Subordination).  If the lease precedes the mortgage, the lender
will often need or want to have the lease be subordinate to the
lien of the mortgage so that their mortgage is in first position in
regards to any claims on the property.  And if the lease was
entered into subsequent to the mortgage and the lease is
therefore already subordinate to the mortgage, the lender will
want this written acknowledgment that the lease is subordinate
to the mortgage and an agreement that subordinates any other
rights that the tenant may claim in the property to the mortgage.

Finally, the tenant also agrees that if the lender forecloses on
the property then the tenant will look to the lender, if they are
the new owner of the property, as the landlord (Attornment),
even though the tenant’s lease agreement is with the original
landlord.  As a result of such attornment and the tenant looking
to the lender as the new landlord, the tenant will pay all future
rent to the lender as opposed to the original landlord.

While an SNDA does provide the commercial tenant with some
protection, they are not perfect protections for the tenant.  
Primarily, the SNDA is an agreement between the tenant and
the mortgage holder but if a third party, other than the
mortgage holder, obtains ownership of the property through the
foreclosure sale, then this third party, who was not party to the
SNDA, may not be bound by its terms.  However, because of the
SNDA, the tenant probably would not be joined in the
foreclosure proceedings therefore their lease may still survive
the foreclosure even if a third party is the successful bidder for
the property.

                                                                       Return to Analysis of
                                                                       Tenant's Rights in Foreclosure
Law Office of
Craig W. Little, P.A.