What Happens to Tenants During a Commercial Foreclosure?

February 23, 2012
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As New Jersey’s economy continues to struggle, the number of commercial foreclosures is steadily rising.

Therefore, it is understandable that many office, retail, and even industrial tenants are worried that their business operations may be impacted by foreclosure.

What Happens to Tenants During a Commercial Foreclosure?

To address these concerns, this post discusses one of the legal protections that should be considered for inclusion in your lease to guard against the possibly that your landlord enters foreclosure.

State laws generally provide that commercial leases are extinguished by foreclosure, with limited exceptions.

Therefore, in most cases, if the mortgage was recorded before the lease, foreclosure will wipe out the lease. This legal principle is commonly referred to as “first in time, first in right.”

Despite this seemingly harsh rule, most tenants should have certain protections pursuant to their lease documents. Specifically, you will need to look at your lease documents to see if you have signed a subordination, nondisturbance and attornment agreement.

The landlord, tenant, and lender all generally sign the SDNA agreement. It outlines how a foreclosure, refinance, or sale of the leased property will impact each party’s respective rights and liabilities. In particular, it will stipulate whether the lender or other new landlord must agree not to disturb the occupancy of the tenant (as long as it has complied with all of the other lease terms) and provided the tenant attorns to the new landlord.

In the event that your lease does not contain these protections, the new landlord can ask you to sign a new lease, which may contain less favorable terms. In the worst-case scenario, the new landlord could seek an eviction. However, in the current economy, most landlords are happy to keep good tenants who pay their rent on time.

Finally, SDNA agreements are generally legal complex documents. Therefore, if you are concerned about the potential impact of a foreclosure on your business operations, it is best to consult with an experienced business attorney.