You’ve probably been told to make sure you read the fine print before signing anything. Most of us know we need to, but sometimes everything we read isn’t easily understood.
Signing a commercial office lease is no exception.
Lack of clarity should never be the reason you ‘just sign’ a lease. We thought it would be beneficial to highlight three of the most misunderstood lease clauses, which are: Non-Disturbance, Subordination, and Attornment. These are very technical terms, which is why they are the most misunderstood.
When faced with either subordination requirements in the lease or landlord requests for subordination, a tenant should seek the protection of a non-disturbance agreement. It is prudent for the tenant to obtain a non-disturbance agreement from any existing mortgage lender holding a mortgage on the property when the lease is executed. The tenant should avoid agreeing to “automatic subordination” clauses that could undercut its priority or modify such provision to state that it shall only become effective after the lender has executed and delivered a non-disturbance agreement in favor of the tenant. With respect to the issue of security of tenure of the premises, a non-disturbance agreement restores the tenant to the same position as it would have been in had the lease continued to have priority over the mortgage and places the lender in the same position as a lender enforcing security on a property with a prior ranking unsubordinated lease.
As illustrated by the two examples set out above, the rights of the tenant greatly depend upon whether it has “priority” over the lender’s mortgage. This tenant priority may be lost (a) in accordance with the terms of the lease or (b) pursuant to the provisions of a subordination agreement. In many leases, the tenant has agreed to a provision stating that “the tenant hereby subordinates its lease to any present or future mortgage made by the landlord registered against title to the property”. Such an “automatic subordination” clause, without corresponding “non-disturbance” protection, could severely undermine the rights of the tenant in a landlord loan default situation. Many lenders wish to have such a prior position so that they may elect to “pick and choose” which of the leases the lender will agree to honor if a loan default occurs.
If a mortgage has priority over a lease, upon loan default, and enforcement by the lender resulting in taking possession of the property, the tenant is in turn free to leave. Case law has confirmed that a tenant, subsequent in priority, may be permitted to escape its long-term, above-market lease obligations upon the completion of a foreclosure by a lender or otherwise upon the lender entering into possession. In a soft leasing market priority of the mortgage over the tenant’s lease may subvert the lender’s desires. The lender should be asking the tenant to “attorn” to the lender in these circumstances. Attornment would consequently protect the lender from the risk of the tenant vacating when the tenant has been paying above-market rent for the leased property. A well-drafted attornment clause will include an obligation of the tenant to attorn to any successor in title including any purchaser the lender might sell the property to following or as part of the exercise of the lender’s loan enforcement remedies.
For more information on these clauses, click here.