How Does a Foreclosure Affect a Retail Lease?

A foreclosure by a lender of a landlord’s property terminates all subordinate leases on the property. In the absence of an SNDA (as discussed below), then whether a lease is subordinate is determined by the timing of the mortgage or similar instrument and the date of lease (which was entered first) and the language of the lease itself.

In the instance of a lease entered into before a mortgage, the lease will survive the foreclosure because the rights of tenant are senior (or not subordinate to) the mortgage. However, please note that many retail leases contain a clause that a lease is subordinate to all mortgages (even those entered into after the lease), in which event the foreclosure will terminate the lease despite the lease’s seniority.

In the instance of a mortgage entered into before the lease, the foreclosure will terminate the lease. Landlord would then bring an eviction proceeding against tenant.

Please note a lender could foreclose the mortgage and inadvertently terminate the lease because they are subordinate to the mortgage. Therefore, many leases contain clauses that permit the lender to elect for the lien of the mortgage to be subordinate to the leases (even if the mortgage is actually senior to the lease). Under such a scenario, the lender forecloses and the new owner takes subject to the prior leases it desires to keep even if those leases are subordinate. In this way, lender actually cherry-picks the leases it wants to keep versus those it wants to foreclose.

As mentioned above, many lenders and tenants seek to enter into an SNDA for retail leases even though one party is senior to the other. This permits the parties to establish the fact that the lease will survive and tenant will attorn (or recognize) the lender as the new landlord after foreclosure. An SNDA is an agreement between the lender providing financing to the landlord and a tenant of the property. SNDA stands for Subordination, Non-Disturbance and Attornment agreement and the various components are broken down as follows:

  • S: The tenant agrees to subordinate this lease. All lenders typically require the lien of their mortgage have priority and a senior position over all other matters. Put simply, a lender wants written assurance that its loan is of a higher priority than the property’s leases.
  • ND: In exchange for the subordination and attornment discussed below, the lender agrees to leave the lease in place (or not disturb the lease) in the event the mortgage would otherwise foreclose the lease. Tenants should use best efforts to condition the subordination to and attornment of the lender on the receipt of a non-disturbance agreement from the lender. Otherwise, tenant could be in full compliance with the lease, yet lose its lease through no fault of tenant.
  • A: Tenant recognizes the lender as the new landlord. If lender desires the Lease to stay in place (post foreclosure), then it wants assurances that the Tenant will recognize the lender as the new Landlord. The lender needs to know that the rental stream will continue to be paid to lender, and maintaining the rental stream is crucial.

Depending on the priority of the lien of mortgage, a foreclosure of the landlord’s property could foreclose a retail lease. Therefore, the parties often attempt to address the competing interests related to the potential foreclosure of the lease in the lease and in the SNDA.

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