When signed the lease and moved into your office space, you probably had little concern that the building you office in might end up in commercial foreclosure. But it could. Foreclosure, whether commercial or residential, is the last course of action in the event a borrower defaults on a mortgage. Do you know your rights as a tenant, if your landlord fails to make timely loan payments and the lender initiates a foreclosure?
Tenants Rights in Commercial Foreclosure
How a commercial foreclosure affects the tenants of a property will depend on terms outlined in the leasing agreement and the date it was signed. The date is important because if the lease wasn’t signed prior to the date that the mortgage was executed, it could be voided according to a legal concept referred to as “first in time, first in right.”
Some commercial leases spell out what happens in the event of a foreclosure, and are maintained under Subordination, Nondisturbance, and Attornment (SNDA) Agreements.
- Subordination Clause – gives the third-party lender the option to terminate a lease in the event of foreclosure. A subordinate lease without a non-disturbance agreement can be immediately terminated.
- Non-Disturbance Clause – allows a tenant to continue to occupy the space as long as they’re not in default of the leasing agreement.
- Attornment Clause – ensures that the tenant will continue to pay rent to the new landlord throughout the remainder of the leasing term.
Prior to signing on the dotted line, it’s extremely important to have a real estate attorney review your commercial lease agreement. Not doing so could mean an unforeseen foreclosure will leave you and your company out on the street.
While laws vary from state to state, commercial foreclosures are generally very similar to their residential counterparts, and can result in either a judicial or nonjudicial process.
As its name suggests, judicial foreclosures are settled in court and are the result of a lawsuit filed by the lender against the borrower. The lender seeks a judgment of foreclosure and, ultimately, an order to sell the property.
If the lawsuit is contested by the borrower, meaning they maintain the lender’s claim is erroneous or unfounded, a trial will ensue.
In a non-contested lawsuit, the court will issue a default judgment and authorize the sale of the property.
If the loan documents contain a power of sale clause, then the lender can proceed out-of-court. This allows the lender to sell the property without court supervision. First the lender will have to file a notice of default with the county, mail a copy to the borrower and other interested parties, and then publish the default notice or a notice of sale.
Do Property Owners Have Alternatives to Foreclosure?
They do, but it’s best to first secure the services of an attorney experienced in commercial property foreclosure. A knowledgeable attorney can research many options for property owners, including:
- The restructuring of loans, such as refinancing,
- Workouts related to commercial development,
- Re-negotiation of commercial leases, or the
- Formation of holding companies, partnerships or joint ventures.
If you are at risk of foreclosure, don’t just walk away from your investment. You may have options. The experienced commercial real estate attorneys at Bennett Weston LaJone & Turner, P.C.can advise you on your alternatives.